The 2nds do not just disappear but rather they accept a reduced settlement just like they would in a short sale. Here’s an example of how it would work. Property bought for $500k with 80/20 loan. Stop paying 2nd, negotiate loan mod on the first and tell 2nd to go pound sand. After 6 months of not getting anything 2nd comes back and offers to settle for 10 cents on the dollar. Homeowner writes a $10,000 check and the $100,000 2nd is gone….a de facto principal reduction. I know an attorney that has negotiated several of these and have seen the paperwork with my own eyes.
This is not a single answer to underwater homeowners escaping but one of many scenarios going on out there.
