Total Bankruptcy

Business and finance press watchdog Dean Baker of Beat the Press analyzes a NYTimes report indicating that in some hard-hit areas, foreclosures exceed home sales.  Pretty wow.

Here's the sentence that intrigued me:

In fact, the percentage [of foreclosures] that do result in sales are likely to be higher today than in the past because fewer mortgage holders will bother with foreclosure proceedings on second mortgages.

The question of second mortgages is an interesting one.  Of course, just like first mortgages, your bank has every right to start a foreclosure proceeding on your second mortgage.  Baker's point is that some mortgage lenders in certain areas of the country (he mentions Las Vegas and Florida, two of the hardest-hit) won't bother with foreclosing on second mortgages because they don't stand to recover anything after the first or primary mortgage is dealt with.

Second mortgages are often unsecured loans, just like home equity loans; this means that when home prices have plunged, the owner is stuck with a loan that's not backed up by any tangible asset.  Unsecured debts like this can be eliminated in Chapter 13 bankruptcy, which strips any excess unsecured debt that exceeds the actual value of your home.  Your second mortgage would exceed the actual value of your home, and therefore that debt would function like any other debt (credit card, etc).

There's the impetus behind the "recycling" of these foreclosed homes: if the debt can be stripped, the lender likely won't pursue getting that non-existent money back and will make what it can from the housing market.  Which, these days, isn't much.

For more on bankruptcy and second mortgages, talk to a bankruptcy lawyer near you!