"I received a confidential note from a firm claiming that they can eliminate my second mortgage. I am inclined to believe them because the value of our home is now less than the amount of the first mortgage. Is this an opportunity or a scam?"
The answer to your question is not clear, but the misinformation in the note they sent you suggests a need for caution. The note says "that your second mortgage … may be eliminated due to a significant decrease in property values in your area …" In fact, the decline in the value of your home does not in any way eliminate the second lien on your property or your legal obligation to pay the second mortgage.
The only way to eliminate the obligation is to negotiate a deal with the second mortgage lender to remove it. When a borrower has negative equity, a second mortgage lender may be willing to relinquish its claim for a fraction of the amount owed because the alternative may be to lose it all.
Some borrowers with negative equity remain current on the first mortgage but stop paying the second. This puts the second mortgage lender between a rock and a hard place. If the second mortgage lender forecloses, it will get nothing, but if it doesn’t foreclose, it allows the borrower a free ride and might encourage other borrowers who are "underwater" to do the same.
Second mortgage lenders who would like to extricate themselves from situations like these may be receptive to a proposal that would leave them with something rather than nothing. This might be a cash payment, an unsecured note for some or all of the loan balance, a share in future house appreciation, or some combination of these.
The second mortgage lender in this situation has one bargaining chip. The borrower won’t ever be able to sell the house without paying off the second mortgage, and the payoff amount will include all accrued interest and penalties. It would be foolish for the borrower to ignore this.
The company that contacted you wants you to authorize them to negotiate with the second mortgage lender on your behalf. While they can’t do anything for you that you can’t do for yourself, a professional who has done it before might be worth the cost. Before I took that plunge, however, I would do my homework on the firm, which would include interviewing past clients.
My involvement in an Internet scam
In April, an ad appeared in the "RentsBuy Classifieds" section of a real estate website in Vientiane, Laos. In part, the ad said "Apply For Your Loan Today: I am a private money lender and I render financial assistance to interested people that are God-fearing and will not take advantage of my money and run away with it … contact me at email@example.com …" It was signed by Dr. Jack Guttentag of the Guttentag Loan Investment Company.
The ad was seen by a local man who asked for more details. He was immediately contacted by the fake Guttentag who asked for contact information, and asked him how much he wished to borrow.
The Laotian said he needed $320,000 and the fake Guttentag then sent him an application form. The form was skimpy compared to those used here — it asked nothing about collateral or credit, but it did ask, "Are you a trustworthy person?"
The terms of the $320,000 loan were included in the packet with the application form. The rate was 4 percent and the term 15 years, with a monthly payment (accurately calculated) of $2,367. The borrower reported a monthly income of $2,000, but in the e-mail exchanges between the Laotian and the fake Guttentag, income adequacy was never mentioned as a possible problem.
What did come out in these exchanges was a requirement that the Laotian pay an advance fee of $950. This was a legal requirement insisted on by the fake Guttentag’s legal counsel, who had prepared the most elegant-looking loan agreement I have ever seen.
The deal began to unravel (and the real Jack Guttentag entered the picture) when the victim decided to see if he could find the website of the Guttentag Loan Investment Company, and instead found me. On hearing his story, I did a little online research and found, not surprisingly, that the fake Jack Guttentag resided in Nigeria, the scam capital of the world.
This was not a message the Laotian wanted to hear. His first impulse was to enlist my aid in persuading the fake Jack Guttentag to deliver the loan that had been promised him!
It took awhile for me to convince him that nobody will make a loan of $320,000 to someone with an income of $2,000 a month, no collateral and no credit record. Legitimate lenders, furthermore, receive their fees at the time the loan is closed, not in advance.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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