For many, escaping onerous mortgage payments on negative equity properties lifts a huge financial burden. Leo Stawiarski Jr. though still wants to collect the outstanding second lien. He is the President and CEO of LCS Financial Services a service that will track down those borrowers, in an effort to collect the second lien. He also operates an affiliated collection law firm, Stawiarski & Associates, though he reveals documentation issues are not an impediment to his business.
HousingWire sat down to discuss LCS Financial strategy with Stawiarski.
HousingWire: When is a second lien worth tracking down?
Leo Stawiarski: To make this decision, a lender needs to first perform an equity analysis and determine the best course of action as it relates to the property. If the subject property has substantial equity, the lender could foreclose from the second lien position, use the proceeds to pay off the first mortgage, and use the remaining proceeds to mitigate their loss on the second mortgage.
Given the current economic environment, it is unlikely that sufficient equity exists in a property to completely pay off the second mortgage. Therefore, the second mortgage lender needs to consider alternatives to foreclosure. If the subject property has some equity, my company may recommend that the borrower consider selling the property in a short sale. If the borrower is amenable to a short sale, the borrower must contact the first mortgage holder to see if they would be willing to entertain a short sale and accept a negotiated settlement of their indebtedness. If the first mortgage holder is agreeable, LCS Financial will attempt to negotiate a reasonable settlement on behalf of the second mortgage holder.
Another option may be to negotiate a repayment plan based upon a borrower’s ability to pay. Re-performance will keep the borrower engaged, reduce indebtedness on the second and provide more time for a short sale or refinance transaction as market conditions improve.
In a situation where there is no equity in a property, and the lender is unable to enter into a voluntary repayment program, the lender can pursue their contractual rights under the terms of the loan instruments. In accordance with state law, the lender could initiate litigation to reduce the promissory note to a judgment and satisfy the judgment by utilizing all state sanctioned collection remedies, for example wage or bank garnishments.
HW: Do you think it's unfair to go after the borrower, even when they are no longer in the property?
LS: While we understand that borrowers may find themselves in difficult financial circumstances, as a lawyer representing the second mortgage holder, my primary focus is to enforce the terms of the binding contract between the lender and the borrower. At LCS Financial, our objective is to ensure that the borrower meets their contractual obligations to our clients, taking into account the borrower’s ability and willingness to repay the indebtedness.
HW: We've heard of paper problems on firsts, is it pretty much the same with seconds?
LS: Most lenders do not pursue foreclosure from the second lien position and tend to pursue other collection remedies to recover on their second lien portfolios. Therefore, our clients do not see the same type of allegations on their second mortgage portfolios as they see on their first mortgage portfolios.
HW: What do you tell mortgage servicers to do in the case of strategic default?
LS: When working with servicers, lenders and investors who are experiencing the financial loss associated with strategic defaults, I recommend that they pursue their rights under their loan instruments. The specific strategy will depend on state laws and whether the default involves a first or second mortgage. For example, if the default relates to a first mortgage, servicers or lenders may choose to initiate foreclosure and, subject to state law, pursue any remaining deficiency judgment. Whereas, if the default relates to a second mortgage, the servicer or lender should consider, again subject to state law, suing pursuant to their rights under the promissory note, obtaining judgment and utilizing all state sanctioned collection remedies, for example wage or bank garnishments. One of my affiliated entities, law firm Stawiarski & Associates, focuses exclusively on collection litigation and can service our clients’ needs if legal action is necessary.
In addition to the impact on servicers, lenders and investors, strategic defaults affect numerous other parties. These defaults adversely affect neighborhood property values because they lead to excess inventory and property deterioration. Moreover, strategic defaults generally impact taxpayers. Most loans are now government owned, insured, or guaranteed which means taxpayers are essentially funding strategic defaults. The key is to create an environment of responsible homeownership where financially capable borrowers honor their obligations because they know there will be consequences if they simply walk away. One of the clearest ways to create such an environment is for servicers and lenders to pursue their remedies when faced with strategic defaults.
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