January 14, 2008

You've read a lot about the subprime meltdown and billions in writeoffs. But you haven't heard boo about "second mortgages". You will.

Get ready.

This next wave of debt-bombs are set to go off all over America. The wildly-popular "80/20" loans allowed the AAA-rated 80's to get sold off to CDO-land and to Fannie and Freddie to investors who thought the buyer was putting 20% down, and the higher interest no-collateral 20's got sold off too, but to who knows who.

And millions also took out "Seconds" in order to fund their over-spending these past few years. What happens to these loans now that the equity they were based on has disappeared? Man, ya gotta wonder if BofA knows the all the crap they just stepped into.

Here's a few juicy tidbits on Seconds:

The loan bomb
Other troubling arrangements are the 80-20 loans - a combination of a first and second mortgage to cover 100 percent of a home's price. The rate on the first mortgage may or may not be adjustable, but in almost all cases the rate on the second mortgage is set to shoot way up.

Straight Talk on the Mortgage Mess from an Insider
Sub-prime aren’t the only kind of loans imploding. Second mortgages, hybrid intermediate-term ARMS, and the soon-to-be infamous Pay Option ARM are also feeling substantial pressure.

The ’second mortgage implosion’, ‘Pay-Option implosion’ and ‘Hybrid Intermediate-term ARM implosion’ are all happening simultaneously and about to heat up drastically. Second mortgage liens were done by nearly every large bank in the nation and really heated up in 2005, as first mortgage rates started rising and nobody could benefit from refinancing. This was a way to keep the mortgage money flowing.

Second mortgages to 100% of the homes value with no income or asset documentation were among the best sellers at CITI, Wells, WAMU, Chase, National City and Countrywide.


6%...8 Tracks & Dino's said...

Ah...The second mortgage or home equity loan as the bank so proudly touted back in the day. I was suckered in by the "tax break" line to finance construction on a unfinished upstairs. I found out the the tax break was minimal while the interest was crushing. It is not very fun to look at your 1st mortgage and see they raped you for $800 in interest and then look at the 2nd mortgage and see they rolled you for another $300 on it. I sold the property and got out before the slide but I can only imagine being stuck in todays market.

LauraVella said...

Also, the trend has been to buy a home with two mortgages to avoid PMI...how will that work out for the banks when their homeowner can't make the payments any longer?

Is that an unsecured first and second?? Anyone?

There are so many different variables at play which will crash the banking system. And we still have the credit card bubble to blow.

Malcolm said...

CNN just did a live-shot down the street from me.

A neighborhood of McMansions (she actually used the term), 60% on the block in foreclosure. Homes that were bought for $700k. Now listing for $400k, and still no offers.

That’s the problem with playing musical chairs. The music eventually stops and someone is left standing. They should have stuck with kick the can.

bank dick said...

Not to worry, it looks like plans are already in the works to "streamline" the foreclosure process. Under proposed rule changes, the REO stage would be skipped entirely with lenders doing a short sale and somebody (GSE, son of RTC, China?) picking up the tab for the loss.

Only in Amerika...

Wayne said...

not that anyone cares, but here's my 2nd loan story

I sold my house in summer 05 at a hefty profit and bought another house that was well in to the Jumbo loan range. At the time the 2nd loans had teaser rates of like 2% or Prime -x%, and with all the money I made on the sale of my house I thought it would make sense to go ahead and get 100% financing (80/20) and invest that $200k. At first it made sense, I was making more $ in interest than I was paying in interest for the 2nd mortgage, however I soon realized it was BS (after the teaser rate ended), when calculating these facts -

1- The 2nd was costing me about $850/month, and I was saving -maybe $100 of that in tax break.
2- I was making about $650/month in interest income from one of the online savings accounts (roughly 4.5%) which would be added to my income tax for the year, hence wiping out my tax savings as the sales pitch goes.

I realized I was paying $200 a month for the priviledge of having a bunch of cash sitting in the bank. $200 is a small amount to pay for all that security of having gobs of cash at your disposal, however This cash was not a good thing, psychologically it was more money than I had ever had, and I was doing stupid things like buying furniture, vacations, cars etc.

So I called my mortgage company they said "Yes if you pay the balance to $0, you will still have an open line of credit that you can draw upon using your mortgage "Checkbook". I thought it's the same security but it'll save me $200/month.

So I paid the mortgage off, wiping out my savings account, less about 1 year of expenses for reserve. The idea was to swap my CA$H reserve for a Home equity Reserve. About a week later I get a letter from the mortgage company saying that they are in bankruptcy and any draw requests against second mortgage will not be honored since there is no money available.

Now that the bank is bankrupt and the house has lost 20% in value, I'm still hovering around being 95% financed even though I just spent about $200,000.

I know others who were in a similar situation but they actually blew all their money and have no way of paying off that 2nd mortgage...

In reality I'm no richer than I was before, but psychologically I'm $200,000 less wealthy. Hence, no more pricy vacations, no more home improvment, no more consumer durables purchases, no more automobiles. It's not that I can't afford it, I make plenty of money, but now I'm just not as optimistic and don't believe the hype.

Anonymous said...

Wayne, you were correct in assuming that no one cares.

I went to Vegas and spent 200K gambling one time. I went home with nada... boo hoo.

pwnd said...

Wayne, that is an interesting story, and very germane.


Vectorz said...

Wayne, thanks for the informative and *HONEST* writeup.

Wayne said...

It wasn't a boo-hoo story. I didn't lose a dime. I was trying to point out how FB's perceive home equity as real money, I on the other hand always kept enough $ to pay off my mortgage Luckly I had the money to do it. Alot of people simply don't.

Anonymous said...

What happens to a property when the loanowner stops paying on the 20% loan?

Anonymous said...

bank dick said...
Not to worry, it looks like plans are already in the works to "streamline" the foreclosure process. Under proposed rule changes, the REO stage would be skipped entirely with lenders doing a short sale and somebody (GSE, son of RTC, China?) picking up the tab for the loss.

Only in Amerika...

January 14, 2008 3:35 PM

Link? Source?

Michael said...

So where will this credit crunch head next? Think about what people use their HOLC for. One big use has been to collage tuition for Jr. With the housing ATM closed down look for a wave of college drop outs and smaller incoming freshmen class sizes. Unemployment will head up as all these would be students instead head into the work force. Just like in housing, the price of an education is set by the marginal buyer/student. Look for tuition to start heading down at all but the top tier schools. It may take some time as the cost cutting will not start right away and it takes time to unwind all the bulking up schools have done over the last few years.

Merciless Ming said...

I agree Keith, I think the B of A ... and others... just stepped in a gigantic dog pile.

They're going to have a hard time getting rid of the sh*t.

happy homeowner in the stix said...

The idiots in the media missed the whole bubble runup in the first place. Why do you think they would have suddenly gotten wise and figured out about the 80/20 mess?

Remember...in journalism school, the pretty ones go to TV stations, the ugly ones go to newspapers, and the smart ones don't exist.

Anonymous said...

Look for tuition to start heading down at all but the top tier schools.

Negative. Like the housing market sales are down but median prices are up means that only rich people are buying.

Harvard and Yale and those types are untouchable. Besides, if rich Americans cannot go there are plenty of forginers (sp) more than happy.

Anonymous said...

Property Taxes will be the final death blow

Anonymous said...

What happens to a property when the loanowner stops paying on the 20% loan?

January 14, 2008 7:34 PM

Here's what I would have done back when I was managing a portfolio of 2nd mortgages (which were ALL prime FICO, fully amortized, documented-income loans):

I would have declared default and sent the lawyer off to get a judgment against the borrower for the loan plus legal fees and default interest (which keeps adding to the tab until the debtor pays it off). Then I would have checked the value of the property and NOT foreclosed if the house was upsidedown.

If the bank owns the 2nd mortgage they can be patient and wait like a wolf at the gates. We would have placed a judgment lien on the property, of course, but the judgment stays on the borrower for 20 years in my state if unsatisfied. The only escape from that Judgment is bankruptcy, and most people around here earn too much income to qualify for ch 7 under the new rules.

Then I would have ordered an asset trace to see if my lawyer could seize bank accts or place a lien on future paychecks to satisfy the judgment. We'd have 20 years to periodically seize what we could get from the debtor while still accruing interest on our judgment until paid.

After 7 - 10 yrs, I would expect the property to appreciate back to a level where the borrower could sell it for enough to pay off the 1st mortgage and my lien. Or, we could keep going after income and assets until we get paid. A foreclosure on by the primary mortgage lender doesn't wipe out a personal judgment so we'd still have a chance to negotiate a settlement in the future.

20 yrs is a long time to keep looking over your shoulder, so eventually the debtor will pay me off to get me off his back. If he ignored the judgment, he would have bad credit for 10 yrs (unsatisfied legal judgments stay on credit reports for 10 yrs, not 7 like chargeoffs). He'd then have an additional 10 yrs of my judgment showing up against him in the court records whenever anyone ran a background check on him - under normal underwriting & title work he would be unable to buy more real estate until he'd paid me.

Just to repeat - this only worked with normally underwritten loans to borrowers with good jobs and previously good credit, not with crackheads or illegal aliens.

PS: I worked a case where a guy shafted us for an unsecured credit card 12 yrs beforehand and we still got him to pay us everything plus interest so he could get rid of the judgment. Homedebtors and fliptards forget that the judgments are against a person, not against a building or a piece of plastic you carry in your wallet. Lack of collateral doesn't mean banks don't have you by the balls!

PPS: All the money we spent on collections and lawyers got charged to the debtor when they caved and paid the judgment off. Ha-ha!!