Second mortgages may haunt borrowers in foreclosure

second mortgages the next big problem for homeowners
second mortgages the next big problem for homeowners

Just when owners think their mortgage nightmare has ended with the loss of their home through foreclosure, the next round of bad news knocks at the door: the bank holding their second trust deed demands repayment of the loan.

Despite heavy political pressure to write off so-called "junior"- or second-lien, mortgages to help struggling owners keep their homes, banks aren't always willing to follow that script. Why? Because those loans amounted to $1 trillion in the U.S. at the end of last year, according to the Federal Reserve, and many banks hold a lot of that paper. A second trust deed is a loan in a subordinate position to a first trust deed loan secured by the same collateral.

Although owners and many banks are trying to strike deals to reduce the payments on homeowners' first mortgages, the main sticking point to consummating those transactions is that lenders holding the first liens often will not accept a deal unless the banks holding the second mortgages take a hit too. But those banks, which are trying to get their assets back in the positive column, don't always want to write off the junior liens.