A question of risk, pt. 1

When you take out a second mortgage on your home, your creditor performs some calculations. They assess the value of your home, your income, your other debts and the overall real estate market within your area. They do this to determine their exposure to the risk of your defaulting on the loan, and as important, your risk of defaulting on your first mortgage.

They also need to determine the stability of the real estate market in your area, say Nashville or one of the surrounding communities. If you live where home values are rising, that climate improves their chances of receiving sufficient funds to satisfy their lien should you become unable to pay back your loan. It lowers their risk of loss on the deal.

As we all know, in the last decade, many homeowners had a very different experience in the real estate market. They may have purchased a home, and because of the rapid increases in home values, they may have taken out a second mortgage, perhaps to make cover the down payment.

This may have seemed like a reasonable action, in light of the escalating home prices, and expectation that that escalation would create equity. Then the bubble burst, and home prices collapsed across the country and in Tennessee.

The second mortgage then went from being secured by the value of the home to being unsecured, as the home’s value fell far below the outstanding balance of the first mortgage.

A case before the U.S. Supreme Court will determine a Chapter 7 bankruptcy can strip off that second mortgage and treat is as an unsecured claim, like credit card debt or if as the creditors argue, the lien can survive the bankruptcy.

Next time we will look at why the Court should allow the lien to be stripped.

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

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