Has Your Second Mortgage Risen from the Dead? 

Home values are rising in Los Angeles and around the country. In February, the median sale price of a home in Los Angeles was up 11.2% compared with the previous February. Generally, that’s good news for homeowners: the value of their asset has increased, which means an increase in equity. Net worth goes up, and so does borrowing power if the homeowner is in the market for a second mortgage or home equity line of credit (HELOC). 

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Table of Contents
  1. What is Zombie Second Mortgage Debt? 
  2. How Second Mortgages Were Impacted by Falling Property Values
  3. Los Angeles Property Values are Climbing
  4. Mortgage Debt and Chapter 13 Bankruptcy

But, for some homeowners, that rise in value has a downside–the reactivation of zombie second mortgage debt. 

What is Zombie Second Mortgage Debt? 

A second mortgage loan works much like the original mortgage loan on your home, with one important difference. The second mortgage comes second. That means that if either lender forecloses on the home, the first mortgage holder must be paid in full before the second mortgage holder can collect anything. 

Between 2007 and 2008, home values in the United States declined dramatically. In Los Angeles County, the median home value declined from $505,577 to $318,075. That’s a 37% drop in a single year. Home values fluctuated in that range for a few years before beginning to climb again. 

With that sudden drop in value, many homeowners found themselves “underwater”–a shorthand for when the amount of mortgage debt attached to the property was higher than the value of the home. This left many homeowners in a serious bind. They couldn’t sell their homes unless they could pay off the excess mortgage debt or reach an agreement with the lender. If they couldn’t keep up mortgage payments during and after the Great Recession, they had few options. 

Homeowners weren’t the only ones negatively impacted. Many second mortgage holders saw their security interests disappear overnight. 

How Second Mortgages Were Impacted by Falling Property Values

Here’s a hypothetical situation to help illustrate this point:

Imagine that in 2002, Brenda purchased a home in Los Angeles for $350,000. She put down $50,000 and took out a mortgage loan for $300,000. Three years later, her home was valued at $500,000. That sounds like a big increase, but it’s slightly below the increase in average home values in Los Angeles across that time period. 

Like many homeowners at the time, Brenda decided to take out a second mortgage to do some work on her home or pay off debt or pursue some other project. Since she owed slightly less than $300,000 and the home was now valued at $500,000, she was able to secure a loan for $100,000. 

After she took out that loan in 2005, she owed just under $400,000 and still had nearly $100,000 in equity in her home. Then, in 2008, the value of her home dropped by 40%. Her $500,00 home is now worth $300,000. 

If Brenda’s interest rate was about the average for the time, she’s kept all of her payments current, and her interest rate was not adjustable, she still owed about $275,000 on her first mortgage. That means nearly 75% of the second mortgage holder’s security interest had disappeared. 

In the high-value, pre-recession days, many mortgage brokers were selling 80-20 mortgages, combining first and second mortgages to cover 100% of the home value. So, when values crashed, 100% of the security interest in many second mortgages disappeared.

Some homeowners who were far underwater lost their homes to foreclosure. Some were able to strip off the second mortgage lien in bankruptcy, since it was effectively unsecured. Others, unable to keep up both payments, kept up their first mortgage loans as best they could and stopped making payments on their second mortgages.

Second mortgage holders didn’t have many options. If the original mortgage holder foreclosed, there was unlikely to be anything left for the second mortgage holder.  Some second mortgage holders simply held the debt and didn’t take any action. Others sold it to debt buyers for a fraction of its value. And, many homeowners went on with their lives, almost forgetting about those defaulted second mortgages. Others believed that they no longer owed the debt, because it was reported as “charged off.” 

Los Angeles Property Values are Climbing

Beginning in 2013, average home values in Los Angeles and most other areas of the country started climbing again. Between 2015 and 2020, the median Los Angeles County home value increased by 31%. Some of those dormant second mortgages began to stir, as mortgage holders or debt buyers saw equity returning. Then, between 2020 and 2021, values jumped again–this time by 25% in a single year. 

For many California homeowners, that means that suddenly somebody–usually a debt buyer–has a security interest in their home and defaulted debt they want to collect. After years of inactivity (or perhaps the occasional toothless collection letter), it would be easy to make the mistake of ignoring these re-upped collection efforts. It could also be catastrophic. 

Erik Clark

An expert tip from Erik

If your defaulted second mortgage has been resurrected from the grave, you’ll want to act quickly to educate yourself about your options and learn more about how to protect your home. You may have options available to you that an experienced bankruptcy attorney can help you to explore.

Mortgage Debt and Chapter 13 Bankruptcy

Chapter 13 bankruptcy is one possible solution for Los Angeles homeowners with delinquent second mortgage debt. In a Chapter 13 plan, you may be able to catch up delinquent balances in monthly installments across three to five years. If your plan is approved and you keep up plan payments and comply with any other orders of the bankruptcy court, the mortgage holder won’t be able to take other collection action or move against the property.

To learn more, schedule a free consultation with one of our experienced Los Angeles bankruptcy attorneys. Just call 877-439-9717, fill out the contact form on this site, or click in the lower right-hand corner of the page to chat. The sooner you act, the better.

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