Settlement of Second Mortgages and HELOCs

In May 27, 2011

There is a “hidden” component to the real estate and financial crisis, and it gets very little attention by the media. I’m referring to the problem with second mortgages on homes that have lost market value during the real estate crash. Banks are being allowed by the Treasury Department to keep large portfolios of second-lien mortgages on their books at values close to those before the bubble Read More …


  1. I filed for Chapter 7 BK and was discharged in March of 2011 after negotiating my own modification agreement with my first mortgage. I owed $350K on the first and could not afford it. Without asking me to reaffirm the debt, they offered me a forbearance of $97K and had me paying on only $253K at 2% for the first five years, 3% on the 6th year, 4% on the 7th year and 4.85% for years 8-30. In the meantime, a balloon payment on my HELOC with Wells Fargo is coming due in the amount of $63,5K. I did reaffirm this debt. However, I’m unable to pay the $63.5K due. I’m now in contact with their modification department and my loan is under review. If they can’t modify the loan, they say they’ll refer me to the department that deals with balloon payment problems. If THEY” can’t help me, they’ll refer me to the department that deals with settlements.

    I now owe $330K on the first. Minus the forbearance, I’m only paying on $233.5K principle. According to Zillow, my home is worth around $330K. According to Wells Fargo (my second mortgage lender) it was appraised at around $312K. Therefore, my first mortgage barely breaks even with my home value and the 2nd mortgage puts me underwater by approximately $64k.

    My questions are these:

    1) Does Wells Fargo still hold second lien status if a) I didn’t reaffirm the first mortgage and b) they weren’t asked to sign any agreements regarding the modification on the first? Since it wasn’t a re-fi and the first merely modified the original terms of the loan, I’m hoping Wells Fargo will see they have very little skin in the game and do their best to negotiate with me.

    2) If WF is second in line, can they still foreclose on my property and would they want to, knowing that they would not likely make anything from the sale of the home?

    3) If we can’t agree upon a reasonable modification, the “balloon payment problem” department can’t help and I end up discussing a settlement, will I still be able to retain my home? Also, generally speaking, what percentage of pennies on the dollar would be a reasonable settlement?

    My home is in California. I’m current on my first mortgage and was current on all payments for the second. In 3-5 years, it’s very likely that I would be at a break even point for both loans but that nasty balloon payment has got me in a crunch. Any insight or advice would be greatly appreciated!

    • Staci, yes, Wells Fargo would still hold second lien status. There shouldn’t have been anything about the modification on the first mortgage that would have affected that position. Yes, they can still foreclose even though they are in the second position, but they would have to fully satisfy the first mortgage balance before receiving anything, and they would also have to absorb the costs of the foreclosure action. Some of your questions I’m not able to answer without spending more time reviewing the situation, and there are also tax consequences to be understood before you adopt a settlement strategy. One thing I would recommend right away is that you have a counseling session with a HUD agency representative, who can review your numbers, look up the loans, and help determine if any of the government modification programs (such as 2MP) might apply to your situation. If you would like a full discussion with me, then please order the $150 consultation via

  2. Question – I had a HELOC with Banco Popular that I stopped paying. It was charged off and sold. I settled with the purchaser of the note and it’s reflected and recorded in the deed. Banco still shows that I owe them the entire balance on my credit report after 5 years. Any advice?

    • Michael, if you settled with a purchaser of the note, that wouldn’t necessarily affect the entry recorded by Banco Popular, as they would have no knowledge of your settlement. Try writing dispute letters to the three major bureaus, on the basis that the balance should be zero, and include a copy of your settlement letter as proof.

  3. I have a HELOC from US Bank that has reported even as recently as April of this year. The 1st mtg. was foreclosed upon in early 2011. I have the sheriff’s deeds, etc. I didn’t file bk afterwards and now the debt is still reporting. They have not attempted to collect on the debt. Their reporting shows “charge off – profit and loss write off”. I need this rectified (I have no intentions of paying US Bank the debt) and the credit company I’m working with needs something from US Bank in writing that they are not attempting to collect on this debt and the credit reporting agency will note it in their remarks which will satisfy my new lender (I’m purchasing). How and what do I need to do to obtain the letter from US Bank? Thanks!

    • Amy, most HELOC loans are recourse debts, which means the lender can continue to attempt collection until the Statute of Limitations has expired (based on the rules for your state). I seriously doubt that US Bank is going to send you a letter saying they won’t pursue this matter. Even if they don’t actually intend to pursue it, it’s still possible they might sell the note to a debt purchaser who will pursue the claim. You can certainly request this in writing from them, but you need to understand that just because it says “charge off” that does not mean you are no longer obligated for the balance.

  4. Charles, as soon as I saw this, I asked the credit bureaus to fix it in my credit reporting. But I thought since the BoA has this balance lingering on my account the credit bureaus may become difficult. I hope they look at the facts and see how Banks are not really serving their customers. The BoA customer service told me that this is how they get back at people who do not pay their debt. No regards for the fact that I got laid off in 2009/10 and was not able to get a job for a year as all companies were laying off and not hiring, then BoA told me no problem they will work with me until I get a job. But after a year they demanded the full behind payments plus late fees, story is long like many other folks, but BoA was worse bank I ever dealt with. Lies, manipulation, zero communication between their dept and on on…
    Sorry for venting off here and thanks for your comments/help.

    • Ali, the credit bureaus don’t care and neither do the banks, too many millions of hardship stories in the past few years (not that they cared to begin with!). They will just forward your dispute to BOA, who may or may not get around to verifying in time. You could also hire an attorney to pursue the matter, but I’m not sure it’s worth the hassle since they are not pursuing the claim itself. Anyway, I won’t disagree with anything you’ve said about this bank!

  5. I had a mortgage and a HELOC with bank of America in CA. The house was in short sale process but the BoA decided to auction it (100K less than short sale price) and therefor it was foreclosed in 2011. Most of the HELOC was paid and the deficiency of 66K was forgiven and the HELOC was settled. At least that what I thought until I pulled my Credit Report and it shows $5388 open balance until 2018. I called BofA and they are saying this amount is the fees and interest and since I am in CA they can’t come after money so they only can show it in my Credit Report as consequences of not paying the whole deficiency. I explained both loans were from BoA and if they waited for short Sale to go through instead of Auction, the HELOC would have fully recovered the full amount. They do not want to hear the whole story and they not care. They are doing this to just get back at me for not paying the deficiency amount. What can I do to settle this?

    • Ali, what you are describing is more of a credit reporting dispute than a settlement scenario. There would not be much point in trying to get BOA to “settle” that $5,388 for a lesser figure and then show the balance as zero, especially if they are not pursuing the claim. What you can do is try writing dispute letters to the three major bureaus to challenge the accuracy of that entry.

  6. Charles… Much appreciate all the info on your site. Am in final settlement discussions on a HELOC in the money. Can you provide recommended language to include in settlement letter to ensure status is changed only to “Paid” and exclusion on any reference to on debt to collection agency or settled for less than balance. Regret creditor unwilling to delete on credit reports.

    • SoCal Al, thanks for your question. There is no recommended language I can provide you with, sorry. The reason is because no creditor will agree to what you are asking. Settlements always get reported as settlements, period, end of story. Yes, I know many people claim it’s possible to settle and simultaneously avoid a hit to the credit, but I’ve been at this game of debt settlement for 18 years and never once seen it happen.

  7. This is seriously the best site ever! I have learned so much! I have my settlement letter from the mortgage company and everything looks perfect. I am now ready to make my payment, but I am really nervous & want to make sure I have my bases covered. The payment is due in two days. They said they can accept payment over the phone using Western Union. My question is should I go with that, a mailed check, or a money order? I want to make sure I have a paper trail of some sort. Thank you!

    • Erin, glad the site content has been helpful to you, thanks. The payment method is not crucial as long as you coordinate it with the creditor. For the larger amounts typically involved with mortgage-related settlements, a safe method is cashier’s check via traceable overnight delivery via FedEx, UPS, the Post Office, etc. Western Union is ok as well. However, that usually entails bringing cash to the WU office, so cashier’s check or money order is safer for you. For settlement amounts exceeding $25,000, I usually recommend a direct wire transfer, but you would need their wire instructions to do it that way.

  8. Hi Charles, I have a 180k 2nd balloon loan due within the next 2 years. I had purchased the house in 2006 for 650k and is now worth 630k. I was looking to settle my second loan because I will not be able to afford 180k by 2016. My question is, do you think I would be able to settle my second loan for 10-15 percent or would I at all be able to settle with Bank of America? Also, my first loan is 400k 30 yrs fixed. Any advice would be great!

    Thank you

    • Markar, your house is in the money, fully covering first plus second. This is not a 10-15% settlement scenario, sorry. If you want a full discussion, please order the mortgage consultation package for $150 via Thank you.

      • What do you mean by “your house is in the money, fully covering first plus second.” I am sorry If I dont understand. Any advice would be great!

        • Markar, you owe $400,000 on the first mortgage, plus $180,000 on the second, for a total of $580,000. Yet you’re saying the home is still worth $630,000 on the market, so “in the money” means there is enough value in the property to cover what is owed on the first plus second mortgage. If the house was worth, say, only $350,000, then the second would be “out of the money,” meaning no equity coverage, in which case a settlement might be possible. In your case, the second lien holder would simply foreclose and recover the whole amount, so why should they settle for 10-15%?

  9. My ex-husband and I purchased an “investment” property in Fl around 2004. The property went into default, we had a short sale that fell through due to the 2nd mortgage. (The 1st agreed to the short sale, the 2nd did not) The home was foreclosed and the 2nd mortgage was sold to Real Time Resolutions. The amount still owed is 58,000. I have since divorced and although according to my credit report, I have zero debt other than this second mortgage, I cannot get a mortgage in my name. The home I live in is in my sister and brother in law’s name. I pay 100% of it. My car is paid off and I have no credit card debt. This second mortgage is the only thing holding me back from being able to put my house in my name and get the tax benefits. I would be willing to settle for under 10% of the amount owed just to clear my credit report but in all that I’ve read about Real Time Resolutions tells me that they are very difficult to deal with. I have disconnected my home phone and they do not have my cell phone so they no longer contact me. Any advice you can give as to the best way to proceed so that I can clear this would be greatly appreciated!

    • Anne, settlement of second mortgage deficiencies is a complicated project compared to settlement of credit card accounts and most unsecured debts. I can’t possibly provide the right advice in a short blog response. If you want a detailed analysis and full discussion, then please go to and order the consultation package. The most common feedback I get after doing one of these mortgage sessions is, “That was the best $150 I’ve ever spent.” :-)

  10. Great Article. Much needed information.

    My house in Florida will be foreclosing soon. The house is worth approximately 120K and the amount owed on the first mortgage is 110K. There is a 150K HELOC with Regions. It’s been a little over 3 years since the last payment was made against the HELOC. I’ve been told that the SOL in Florida is 5 years. To your knowledge, has Regions been pursuing judgments in a situation like this?

    On the other hand, if I choose to settle, what would be a good settlement number? And would I have to pay taxes on the difference?

    For example, if I settle for 25K, will I have to pay taxes on 125K of income?

    If I hit 5 years and the SOL has been reached, what happens? Will I still owe taxes on the loan amount?


    • JL, let’s first make sure you understand that there is no SOL when they still have a lien on the property. Assuming you allow the foreclosure to go through and the lien gets extinguished at sale, then you would have a SOL situation. Without knowing a lot more about the situation, I’m just guessing at settlement figures, but we aim for 10-15% until convinced it has to go higher to resolve. Regions doesn’t have a clear pattern of aggressively litigating these claims, but they do not make it easy to settle either. A lot depends on how well you can document and prove financial hardship, etc.

      On the tax question, yes, the $125k is ordinary taxable income, unless you are eligible for the insolvency exemption per IRS Publication 4681. See my blog post on insolvency for further details on this exemption.

  11. Hi,

    I am being sued by Wells Fargo, the trustee on my underwater 2nd Mortgage. The claimed amount owed is $46,000. They refuse to settle for anything less that 50% and I do not have access to those funds. I went as high as 12,000 at one point. I did speak to an attorney and they have been zero help and continually tell me that the 50% is a good offer. My 1st mortgage is current and I am underwater by $100K on that loan alone. I am meeting with a different attorney tomorrow to discuss the possibility of filing a Chapter 13 BK and attempting to strip the 2nd lien. I also filed an answer and special defense in order to avoid them being awarded a default judgement. They are really playing hardball. Since I filed my answer in October, nothing has happened with my case and I’ve made no additional settlement offers. Any thoughts?

    • Rob, I can’t provide legal active post-lawsuit, sorry. You apparently live in a state where the lender has the option of foreclosing or instead suing on the basis of breach of contract. A lien strip may be possible, so do follow through on that consultation. It may be that the confirmed threat of filing will bring them back to the table with a lower figure than 50%.

  12. Hello Charles, I have been reading posts all morning and here is my situation. We filed chapter 7 in 2009 and did reaffirm 1st and 2nd then got a 1st modification loan last yr and haven’t herd from the bank on 2nd mortgage since filing in 09. Last March we got a assignment of deed of trust saying our 2nd was now with HSBC but haven’t herd a word from them either. Our 1st is 84K and 2nd of 19500 Recently a very simular house as ours in the area just sold for 90K. Housing prices in the small this small town continue to decline and we have now moved across the state. We are 2mths behind on the 1st and have not made any payments on the 2nd since 2009. I would like to sell but know the realtor fees are 7K and closing costs of 1500 along with 2K of upgrades that need done. I would assume if I just allow a foreclosure the sell price would be under 90K and most likely closer to 80k. Do you think my 2nd is a possible settlement option at this point.

    • Kennyray, since the balance on your second is fairly low compared to most, and well under the cost to a lender to foreclose on the average property, a settlement is a possibility here. That said, however, it will depend on a number of other factors — your financial situation, how you look on paper to the creditor, where the property is located, what state you live in, and so on. If you want a detailed analysis and discussion on strategy, please order the second mortgage consultation.

  13. Charles, We moved out of our home 4 years ago after a BK7 and let them home go back. We found out this past March, after trying to purchase another home, that BOA (now transferred to GreenTree), never did anything with the property….we still own it. After talking with GreenTree, we decided to move back into the home and go through a modification….we were denied for all of them. I asked about a settlement and they said to send them a letter stating what I would offer, but it had to be at least 35% of principle to make it into a review. This is our 1st mortgage not our 2nd. Counting the amounts we haven’t paid while not living there for almost 3-1/2 years, we currently owe $254,000. The appraisal that GreenTree had done for the modification came back at $187,000. What would be a realistic number I should offer them to settle to avoid a trustee sale? The home has extensive issues due to vandalism and neglect where it sat empty for so long. I believe if I had an appraisal done, it would actually come back around the $140,000 range. My 2nd is around $69K, I figured I can settle with them pretty easily if I can get this squared away with the 1st.

    Thank you so much!

    • Scott, you have an unusual situation there. My first thought is that you may be better off trying to settle on the second before the first is fully resolved, but I can’t say for sure without having more details. As to what to do on the first, I can’t just state a number based on the info you’ve provided. There are a number of other points I would need to discuss with you before I could recommend an offer strategy. If you want help, go to and order the consultation package for $150. We can then discuss by phone and develop a game plan.

  14. 30 year fixed with Wells Fargo at 370k
    HELOC at 70k with Chase and the Home Loan is underwater by about $25k. Can I settle the HELOC on 15-20% with Chase as I stopped being able to make payments 3 months ago. Charge-off while still living there for the HELOC? Thanks.

    • JJ, if the first mortgage alone is underwater, then yes, you can probably reach a settlement on the HELOC. To give you a better feel for how it would play out though, I’d need to analyze the situation in much more depth, since the outcome would depend on a number of other factors. There are also significant pros and cons to be discussed about taking this approach. I offer the paid consultation for mortgages, $150, via my other website.

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