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A question of risk, pt. 2

First and second mortgages are very different creatures. A first mortgage has priority over any other mortgages. When a lender issues a second mortgage, it recognizes there is some degree of increased risk that should trouble develop, the first mortgagor can foreclose on the property.

When foreclosed, they receive full satisfaction from the proceeds of the sale and if there were any remaining funds, those would go to any junior liens, like a second mortgage. When the senior lien is underwater, the junior liens are worthless in a foreclosure. 

However, in the recent Supreme Court case, the creditors argue they should be allowed to keep their worthless lien in the event, at some undefined future time, the value of the property should increase, such that their lien again becomes secured.

And pigs too may sprout wings.

In the cases in front of the Court, both borrowers are significantly underwater. For one, the cumulative loan to value ratio was 235.8 percent and the other 215.9 percent. This means the homes that secured these debts would have more than double in value for the second mortgages to have any value in a foreclosure.

But the second mortgages real value is to hold the borrower and the first mortgage hostage. A homeowner cannot negotiate a short sale, deed in lieu of foreclosure or loan modification with their lender without obtaining the permission of the second mortgage holder, who in essence, extracts a bribe to "go away."

There is an offensive element to this whole process, in that lenders facilitation of no-down payment, 100 percent loan to value mortgages is what fueled much of the real estate bubble, and now they have the nerve to ask that they should receive better treatment in bankruptcy than they would in a state law foreclosure is virtually absurd.

They took the risk with these loans, and as they say, they need to play the cards they were dealt, because in many cases, they were the dealers.

Newrepublic.com, "Why the Supreme Court Might Actually Rule Against the Corporate Interest," David Dayen, March 23, 2015

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