Second Mortgage Lawsuit & HAMP
I have not paid my second mortgage and rather than foreclose they filed a lawsuit against me. What are my options?
I have a first mortgage with a balance of $297k that has agreed to modify my mortgage and I am in the trial period; I owe 186k on a home equity line of credit and am currently about 7 mos behind. In today's market the home is probably worth what I owe on the first. Instead of foreclosing, the 2nd mortgagee has file a lawsuit seeking a judgment against me for default of a contract, ie their home equity contract. I had been trying to work things out with both mortgage holders for the past 18 months, and had just about given up when I got notice that the first mortgagee would modify the mortgage. So I do want to work something out with the 2nd mortgagee and keep my home, but their offer to settle the lawsuit is for me to pay $550/mo which I cannot afford and which is higher than the original payment (as that was interest only). I had offered to pay them $200/mo provided they would reduce the debt to where I would have some point be able to pay them off. The issue has been that I am a mortgage originator paid commission only, and while I use to make 75k-95k a year, in 2008 I made 24k and in 2009 I made 40k, and probably will make somewhere in between this year. I have exhausted all my resources, except I still have a small 401k worth about 25k. My question is can the second mortgagee sue me when they have not yet foreclosed? I can't afford an attorney, but one I did consult with advised that I should file chapter 13 which I would like to avoid if I can. I have gotten a two-week extension to respond to the lawsuit so any thoughts you have will be appreciated!
- Qualifying for a mortgage modification.
- Resolving your debt options.
- Getting a 401(k) distribution.
Your question touches on the following issues:
- Mortgage modification
- Lines of credit and second mortgages
- Hardship distribution from a 401(k)
- The Making Home Affordable program
The issues in your question are common to many Bills.com readers, and as a result I have answered several questions similar to yours that I will reference as I answer your question. Read the articles I point out along the way to learn additional information.
The HAFA article covers the new federal guidelines under the Making Home Affordable (MHA) initiative, which oversees the Home Affordable Modification Program (HAMP) and Home Affordable Foreclosure Alternatives (HAFA) program.
The MHA FAQs state that under the 2nd Lien Modification Program (2MP), if the borrower's first servicer (lender) is a HAMP program participant, the second lien will be eligible for modification automatically. Most servicers are participating in HAMP. Therefore, check to see if you qualify under HAMP or HAFA, and if your servicer has an incentive to step back and reassess the wisdom of filing a lawsuit.
The good news regarding foreclosure is that lenders do not like to foreclosure any more than homeowners do. Foreclosure offers a poor economic return, and lenders foreclose only as a way of limiting losses on a defaulted loan. The Bills.com article Second Mortgage Foreclosure provides pertinent information about the logistics of a second mortgagor filing the legal documents to foreclose on a homeowner's property. The article defaulting on your mortgage also includes definitions of short sales and deeds in lieu of foreclosure.
I dislike the idea of you raiding your retirement fund in these circumstances. Before you take a hardship distribution from your 401K, read Bills.com article on Information on 401(k) hardship and withdrawal rules to see if you may qualify to do so without penalty. Information and advice on 401(k) cash out discusses penalties.
Do not take a distribution from your 401K unless you can do so as a hardship. You will pay a 10% penalty tax if your situation does not qualify as a "hardship." The withdrawal penalties and other taxes is not worth losing the funds that are protected from garnishment and levies.
It seems unfortunate that the servicer of your line of credit has filed a lawsuit instead of trying to negotiate with you. That is why HAMP and HAFA were created -- to give homeowners an opportunity to stay in their homes. Investigate if your current servicer is participating in HAMP and whether you are eligible for the modification. If so, then the line of credit service provider will be eligible for the government program and is bound by its guidelines. This may be the incentive the servicer of the line of credit needs to stop the lawsuit. Under HAFA, selling your home may be the next alternative prior to actually filing bankruptcy.
Hire an attorney licensed in your state who has experience in real estate cases or bankruptcy. You need to answer the lawsuit in a timely manner and possibly attend a court hearing. Understand that the servicer of the line of credit will have attorneys attend the court proceeding. You should too, though it is not required.
If you do go to court, your history of attempting to work with both servicers, and your willingness to modify your mortgage will work in your favor. That may not be legally significant, but the court will note your eagerness to settle out of court and may order a delay to order the plaintiff (the servicer filing the lawsuit) to continue bargaining with you.
You may wish to explain to servicer that filed the lawsuit that if you two cannot reach a mutually acceptable settlement, you will be forced to quit the property and allow a foreclosure. Where this to happen, the first mortgage holder will be repaid (you mentioned the balance of the first mortgage is equal to the value of the property), they will get nothing, and if they pursue you for the deficiency you are prepared to file for bankruptcy protection.
You would be wise to have an attorney handle the court hearing and review any other documents you are asked to sign.
I hope this information helps you Find. Learn & Save.