Most mortgage woes nowadays stem from the risky loans taken out during the previous few years: 100 percent financing, no documents, “teaser” starter rates, and so on.
Anyone who took out a 100 percent loan and needs to refinance because the interest rate has adjusted, or will, adjust to a much high rate has found or, will find out shortly, that because of the decrease in value of the property no lender is willing to refinance.
Negotiating a “loan workout” has become a common occurrence. But how often are they truly beneficial? The first obstacle most borrowers encounter when trying to negotiate a loan workout is that the lender is not willing to talk with the borrower until the borrower is actually in default. Default means that some payments have not been paid. If three payments are missed in a row (and it might take that before the lender will consider a loan workout), then the lender can record a Notice of Default with the county and this actually is the first step to foreclosure. If the loan workout doesn’t work, now the borrower has to catch up with payments quickly to save the house.
Even borrowers who are able to do a loan workout should be very careful and review the agreement and understand it before signing. Borrowers may be giving up some rights in the loan workout agreement. In most cases, loan workouts only give borrowers a few months to pay the arrears, on top of the regular payment. In a successful workout, the interest rate is usually lowered or locked at the lower rate for a period of time (1-5 years).
A loan workout may give you time to pay arrears, give you a lower interest rate, and/or a lower monthly payment for some period of time, but it is unlikely that it will wipe out any balance off the loan. A chapter 13 Bankruptcy may be used to do just that-wipe out the second lien.
With the value of real estate property down a significant amount (24 percent according to some surveys), it is possible, even likely, that the borrowers who financed their home with a 100 percent financing, the second mortgage, usually 20 percent of the purchase price, may be completely underwater. In these cases, it is possible to “strip” the second deed of trust in a Chapter 13 bankruptcy and be left with just the first mortgage.
For a free initial consultation regarding these and other related issues including personal and business bankruptcy, please contact attorney Susana B. Tolchard at 661-287-9986.