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Client gets new mortgage after failing to pay 2nd for eight years

By Jeff Lazerson

3/14/19

What’s up with mortgage rates? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.

Rate news summary 

From Freddie Mac’s weekly survey:  The 30-year fixed averaged 4.31 percent, down 10 basis points to a 13 ½-month low. The 15-year fixed rate averaged 3.76 percent, down 7 points from last week.

The Mortgage Bankers Association reported a 2.3 percent increase in loan application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $484,350 loan, last year’s payment was $37 higher than this week’s payment of $2,400.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages at  a zero-point cost: A 15-year FHA (up to $431,250 in the Inland Empire, up to $484,350 in Los Angeles and Orange Counties) at 3.375 percent, a 30-year FHA at 3.625 percent, a 15-year conventional at 3.50 percent, a 30-year conventional at 4.0 percent, a 30-year FHA high-balance (from $484,351 to $726,525 in L.A. and Orange counties) at 4.0 percent, a15-year conventional high-balance (also $484,351 to $726,525) at 3.75 percent, a 30-year conventional high-balance at 4.25 percent, jumbo (over $726,525), a15-year jumbo (over $726,525) at 4.0 percent and a 30-year jumbo at 4.75 percent.

What I think: This loan approval was more than a pleasant surprise. It was my most stunning loan approval ever. Thank you, Fannie Mae!

Allow me to explain.

My client had both a first and second mortgage on his Southern California home. He fell on hard times back around the Great Recession days. He filed for Chapter 7 bankruptcy in 2011.

Meanwhile, he got back on his feet income wise and credit wise. He made timely payments on the first trust deed, but never paid one penny of his remaining $250,000 second trust deed balance in eight years.

He contacted me about refinancing both his first and second loans into a single new loan. He also had negotiated a $140,000 reduction of the second. So, $250,000 owed turned into a $110,000 second mortgage payoff.

A very sharp underwriter looked more closely at the circumstances of this file. She was able to approve my client on a new Fannie Mae fixed-rate loan with a whopping $545 lower house payment because Fannie’s loan had an interest rate that was 1.875 percent lower than the non-prime loan we were seeking. Hallelujah!

It used to be that mortgage underwriting guidelines were absolutely against any borrower who was perceived as somehow stiffing the lender.  In this instance, non-payment and a reduced payoff.

“I’m pleased to see a lightening of the guidelines,” said Susan Ashton, sales manager at Plaza Home Mortgage. “It’s really a positive thing.”

So, let’s dig a little deeper.

While bankruptcy discharge protects borrowers from having to reimburse lenders for missed house payments, it doesn’t protect them from foreclosure, according to Newport Beach bankruptcy attorney Michael Nicastro. Hence, borrowers typically continue to make their required house payments.

Mortgage lenders cannot demand payment on unpaid debts. So, post-bankruptcy, lenders do not report borrower late payments or delinquencies to credit bureaus.

Often the second mortgages are underwater — meaning the value of the house is less than the sum of the first, second, and accrued interest, etc. So, there is no point in foreclosing.

Those lenders typically sell the non-performing seconds for pennies on the dollar to what is known as “scratch-and-dent” investors. These scratch-and-dent investors hope to collect when the property value comes back.

Nicastro points out that the lender can send to the borrower a 1099-C (Cancellation of Debt), reporting the unpaid balance as income to the IRS.

“Check with your CPA,” Nicastro said. “If debt is canceled in bankruptcy, it’s possible that there is no taxable impact.”