Second mortgage debt collections

Two articles on collections of second mortgage debt being attempted, prior to resolution of the first mortgage. Justice Brandeis Normally, first mortgages have priority, but it appears owners of second mortgage obligations – debt collection agencies – are cutting ahead and demanding payback early and then using questionable tactics to accomplish their goals (e.g., filing suit without giving notice). – Ilene

Decency, security, and liberty alike demand that government officials shall be subjected to the same rules of conduct that are commands to the citizen. In a government of laws, existence of the government will be imperiled if it fails to observe the law scrupulously. Our government is the potent, the omnipresent teacher. For good or for ill, it teaches the whole people by its example. Crime is contagious. If the government becomes a lawbreaker, it breeds contempt for law; it invites every man to become a law unto himself; it invites anarchy. Justice Louis Brandeis

Debt Collectors Raiding Coffers Of Homeowners With Second Mortgages

By Vince Veneziani, courtesy of Clusterstock

foreclosure Americans who decided to take out a second mortgage on their home who are now underwater are in big trouble. In fact, they may finding their bank accounts empty and their paychecks dwindling in the near future:

Housing Doom: Josh Zinner of the Neighborhood Economic Development Advocacy Project in Manhattan said some lenders or trusts for banks that went out of business are selling off second mortgages today to debt collectors for pennies on the dollars. Those debt collectors are then going after the homeowners’ bank accounts or pay checks to recoup whatever money they can.

And if a bank or debt collection agency goes after you, for god’s sake, respond to the complaint in a timely manner:

Perhaps in part because they are not notified, people sued in New York City often fail to appear in court to protect their interests, according to a study released last year by MFY Legal Services, a nonprofit law firm in New York.

MFY found that just seven law firms filed nearly one-third of all the cases seeking to collect $25,000 or less in New York City’s civil courts. Fewer than 10 percent of the defendants in those cases appeared to defend themselves.

“Then there are these high number of default judgments rates,” said Carolyn E. Coffey, a staff lawyer at MFY and an author of the study. She said she was mystified that problems with getting notice could go unaddressed.

Priority? What’s That?

Courtesy of Karl Denninger at The Market Ticker

If you wondered how ugly things would get in terms of lenders ignoring priority (after the government wantonly did so) here’s your answer:

A new foreclosure tactic, whereby lenders or debt collectors holding second mortgages freeze bank accounts or garnish pay checks of already struggling homeowners, is emerging and making it even more difficult for people to hold onto their homes.

It isn’t supposed to work like that. See, that’s the point of a capital structure – the first (secured) lienholder gets his, and if (and only if!) there’s something left, the second gets what they can.

This is why a first mortgage is typically cheaper than a second, among other things.

If the subs are allowed to pull stuff like this then the damage to the first mortgage market could be tremendous – and result in a significant repricing of risk – and thus rates – upward.

Of course it’s the government that started this crap with Chrysler, GM and others. Ignoring capital structure in order to favor certain politically-connected parties at the expense of those who (rightfully) paid for preference through lower coupon rates looked smart (for those who were trying to curry favor with those interest groups – cough-UAW-cough!)

But now we see that when one pulls this sort of stunt it spreads. And spread is the right word for what’s going to start happening to lending rates – soon – if a sock isn’t put in this.

This makes two stories today alone – the other being Saudi Arabia, of course – in which private parties are "learning" from the example set by government, simply ignoring capital structure whenever they think they can get away with it.

Congratulations are in order to Treasury, The Fed and Government – they’ve really made a mess of things now.