A ruling by the U.S. Supreme Court could affect millions of homeowners and change the face of bankruptcy. It is a known fact that millions of Americans have mortgages on their homes. A large number of these mortgaged homeowners have a second mortgage on their homes as well as a first. Today’s ruling will affect everyone who has a second mortgage on their home.
Most people cannot afford to buy a house outright, they have to take a loan out. This loan, which covers most or all of the cost of the home is called a first mortgage. It is called a first mortgage because it takes a senior position when the homeowner declares bankruptcy. The first mortgage holder is paid first. The First mortgage also holds the deed to the house until the loan is paid off.
Many homeowners don’t qualify for enough of a first mortgage to cover the cost of a house. They have to go to a second financial institution to get a smaller loan to cover the balance of the cost of the house. This type of Mortgage, known as a second mortgage, is less of a risk because it is for a smaller amount of money. The company owning the second mortgage can put a lien against the house so if it is sold, the sale cannot go through until the second mortgage is paid off.
When homeowners have declared bankruptcy in many states, the holder of the first mortgage either gets paid or takes the home. The liens for the holder of the second mortgage are often dissolved leaving the holder of the second mortgage unable to collect on it. This gave underwater homeowners an opportunity to get out from under a house that is worth less than they paid for it.
Today’s ruling cancels any legal provisions for dissolving liens by the holder of a second mortgage. It means that a homeowner declaring bankruptcy gives the First mortgage holder their house and still has to pay the holder of the second mortgage. This debt can haunt them and follow them into their grave.
Without bankruptcy protection against second mortgages, homeowners will be less likely to qualify for a loan to buy another home for many years. The debt created by the second mortgage on a home they used to own will crap all over their credit score until it is paid off. With and increasing number of employers using credit scores as a basis for deciding who to hire, the debt of a second mortgage could even affect the former homeowners ability to find a decent job.
Today’s Supreme Court ruling is good for banks and bad for consumers. Many of the people who are underwater in homes today are there because of questionable banking practices in the past. Consumers were made to look more qualified for loans on paper than they actually were. Many bought homes beyond their means, homes that dropped in value with the crash of 2007-2008. Now, the banks are being rewarded for bad behavior so they can collect on the debt they created in the first place.
If you own a home you will see a flurry of mail in your mail box and emails from financial institutions offering you second mortgages. My advice is to resist the temptations offered by these loans. My advice is to think of the years of endless debt they really offer.
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