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The dirty little secret that the servicers of second mortgages and equity loans don't want you to know is that the borrower holds most of the leverage when they fall behind on the monthly payments. These type of loans always fall into place behind the first mortgage. This means that should the home be lost to foreclosure or sold through short sale, the second mortgage won't get a dime until the first mortgage is satisfied in full. With the recent and sudden drop in real estate values nationwide, this means that most of the time, a second mortgage is wiped out or sold off as a total loss in cases of foreclosure or short sale.
Many people will contact their second mortgage when they initially fall behind on payments are shocked to find that the lender will offer a loan modification very quickly and easily. These modifications will generally lower the payments for a period of time to allow the borrower to "get back on their feet". In reality, these plans are usually far from the best they can offer and many times don't provide any kind of long term relief. Most people accept these plans gratefully and begin making payments again not realizing that they just settled for less than they need to and did not successfully capitalize on their position of leverage.

A second mortgage does have the ability to foreclose on a property if the payments go beyond ninety days behind. This "right to foreclose" was written into the original loan documents; however the only reason they would ever foreclose is if the property has a sizable amount of equity and the foreclosure would make financial sense. It would need to give them the ability to not only clear the first, but retain a profit for themselves. In fact if the second mortgage foreclosed they would be doing a huge favor for the first mortgage. The second would now own the property and have to keep everything current, the property taxes (plus any back taxes), the heat (so the pipes don't freeze), repairs, and they would also shoulder the costs of selling the property and paying off the first. These expenses many times add up to more than they are owed in total on the second mortgage or equity loan. This is why the borrower has much more leverage with a second than with the first. If the value no longer remains in the home, what is protecting the second? Nothing, collection is basically no more enforceable than a credit card debt.

The trend over the past 12-18 months has been that the lender of a second mortgage will only hold a loan until it goes to about six months behind. They have been treating these debts as a "charge off" at that point. This means that the lender has declared the debt as uncollectable and the debt is no longer considered an asset within the bank. The debt is usually sold off to a debt buyer for a fraction of what the principle balance is. If a second mortgage is "charged off" the debt is no longer attached to the property in most cases and the new debt buyer will not have the right to foreclose anymore. They still have the right to try to collect the balance and the debt will still appear on the borrowers credit report until it is either "satisfied in full" or "settled" for less than the full balance.Debt Settlements on a second mortgage or equity loan can go as low as 10% and offer the borrower the opportunity to save a huge amount of money when compared to the cost of remaining in the loan and paying month to month until the debt is paid under the lenders terms.

If a borrower is having trouble keeping up with payments on a second mortgage or equity loan they should certainly look at all options to modify the loan and save money. Many people are faced with the harsh reality that their home is worth more than they owe. Modifying or settling their second mortgage may very well be the best opportunity to reduce the principle balance owed and get the property "above water".

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yes I agreed