Tuesday, April 27, 2010

Second mortgages and foreclosures

An article in the April 19, 2010 print edition of Banker and Tradesman quantifies the impact of second mortgages on the likelihood of foreclosure. B&T examined 320,000 single-family homes and condominiums that were purchased between 2003 and the end of 2007 and that (1) involved at least one mortgage and (2) are still owned by the original purchaser. Using an "automated valuation model", B&T concluded that 46% of those original homeowners are now underwater (meaning they owe more on their mortgage than the property is worth). Roughly one-third of those 320,000 homes involved second mortgages. Of that group, 69% are underwater.

Besides increasing the likelihood of foreclosure, the existence of a a second mortgage greatly complicates any effort to have a short sale of the property since the consent of two lenders, both competing for the same too-small pool of money, must be obtained.

My own review of foreclosure cases in this registry district confirms the B&T findings: properties with second mortgages represent a disproportionate share of those undergoing foreclosure.

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