Second mortgages are next housing banking crisis

Well well well..

Lookie here.

Some excerpts from the NY Post

Liening on Banks

Underwater homeowners are jumping onto an unexpected financial life raft that lets them escape crippling second mortgage debts and keep their homes — Chapter 13 bankruptcy.

How it works is this: If the home is appraised at less than the value of the first mortgage, the owner can apply for permission in bankruptcy court to reclassify the second mortgage debt. That changes it from a secured debt, which must be repaid, into an unsecured debt, which does not have to be paid in full. The homeowner can then focus on paying off the first mortgage.

The nation’s banks could take a huge hit from the increased use of Chapter 13 protection. The big four banks, Wells Fargo, Citigroup, JP Morgan Chase and Bank of America, hold $435 billion of the $1 trillion in second liens outstanding…

Borrowers generally prefer loan modifications to bankruptcy. But desperate clients often arrive in Shaev’s office after failing to reach agreements with their banks, despite new government efforts to encourage out-of-court deals.

Before heading to bankruptcy court, Stuart tried to work out a deal with second-lien holder Wells Fargo.

Wells granted a temporary reduction, said Stuart, but then asked for full payments again. Unable to comply, he found a solution in bankruptcy court. Wells Fargo declined to comment.

It’s not a thing you want to do unless you’re desperate enough,” said Stuart S. “But I couldn’t do anything by negotiating directly with the lender.