A peek behind the mortgage modification curtain

The Columbia Journalism Review is not a typical starting point for a behind-the-scenes look at how banks are handling the mortgage modification process, but it was mine today.

One striking mortgage borrower behavior pattern mystified the CJR writer and the author of this linked article: 64% of borrowers who are 30 to 59 days delinquent on their first mortgage are current on their second mortgage. On the surface, that does seem odd.

The answer, however, strikes me as fairly simple. Many second mortgages are the result of home equity lines of credit (HELOCs). The borrower likely has more extensive banking relationships with the HELOC lender – savings accounts, credit cards, checking accounts, etc. The lender is likely to have a right of offset against other accounts if the HELOC becomes delinquent, i.e. fail to pay and your savings account might be seized or your checking account debited.

How does any of this affect you? If you’re considering a short sale, find out whether there is a junior mortgage on the property. The existence of a junior lien is likely to complicate, lengthen and perhaps derail consideration of your offer.

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