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Information on consequences of default on a second mortgage
Tuesday, Jan 8, 2008
Question: I have a first and second mortgage financed by the same company. The second is a 125% loan to value. Needless to say, the housing market has tanked and I would be lucky, if I sold the house, to get $342k back, which is what I owe on the first. What are the consequences if I do not pay the second but stay timely on the first? Can they foreclose on the house?
Answer: If you go delinquent on your second mortgage, the lender can foreclose on your house and property. The foreclosure process varies from state to state, but generally takes from 2 to 18 months. It all depends on the terms of your loan. However, normally if mortgage payments are not received within 150 days, the bank can proceed with the foreclosure process. The second mortgage would be repaid after the first mortgage is paid in full. As in your case, having both the first and the second mortgage with the same company will not make any difference. In fact, if the sale price is less than the value of the mortgages held against it, then in some states you could still owe an unsecured balance called a deficiency balance. The good news is that this new deficiency balance (if it exists and if your lenders pursue it) is an unsecured debt that you could conceivably enroll into a debt settlement programHere is the good news: Lenders do not like to foreclose on mortgages. Foreclosures cost more than can be made back, so lenders foreclose only as a way of limiting losses on a defaulted loan. If homeowners get behind on payments, lenders will most likely work with them to bring the loan current. In order to do so,
however, the owner must stay in communication with the lender and be honest about the financial situation. The lender's willingness to help with current problems will depend heavily on past payment records. If the owner has made consistently timely payments and had no serious defaults, the lender will be more receptive than if the person has a record of unexplained late payments. For those falling behind in payments or who know they are likely to do so in the immediate future, they should contact the lender right away about meeting to discuss alternative payment arrangements.
An agreement between borrower and lender to prevent the loss of a home is called a loan workout plan. It will have specific deadlines that must be met to avoid foreclosure, so it must be based on what the borrower really can do to get the loan up to date again. The nature of the plan will depend on the seriousness of the default, prospects for obtaining funds to cure the default, whether the financial problems are short term or long term and the current value of the property. If the default is caused by a temporary condition likely to end within 60 days, the lender may consider granting "temporary indulgence". Those who have suffered a temporary loss of income but can demonstrate that the
An agreement between borrower and lender to prevent the loss of a home is called a loan workout plan. It will have specific deadlines that must be met to avoid foreclosure, so it must be based on what the borrower really can do to get the loan up to date again. The nature of the plan will depend on the seriousness of the default, prospects for obtaining funds to cure the default, whether the financial problems are short term or long term and the current value of the property. If the default is caused by a temporary condition likely to end within 60 days, the lender may consider granting "temporary indulgence". Those who have suffered a temporary loss of income but can demonstrate that the
income has returned to its previous level may be able to structure a "repayment plan". This plan requires normal mortgage payments to be made as scheduled along with an additional amount that will end the delinquency in no more than 12 to 24 months. In some cases, the additional amount may be a lump sum due at a specific date in the future. Repayment plans are probably the most frequently used type of agreement.
In some cases, it may be impossible to make any payments at all for some time. For those who have a good record with the lender, a "forbearance plan" will allow them to suspend payments or make reduced payments for a specified length of time. In most cases the length of the plan will not exceed 18 months and will stipulate commencement of foreclosure action if the borrower defaults on the agreement.
Foreclosure is a serious situation that has serious repercussions. If you can, you want to avoid a foreclosure as much as possible. Bills.com is here to help. We also offer helpful guides, foreclosure FAQs, glossary terms, and other helpful tools to help you keep your home and avoid a bank repossession.
You can find more information on the Bills.com foreclosure page.
I hope the information provided helps you Find. Learn. Save
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Bill
www.bills.com
In some cases, it may be impossible to make any payments at all for some time. For those who have a good record with the lender, a "forbearance plan" will allow them to suspend payments or make reduced payments for a specified length of time. In most cases the length of the plan will not exceed 18 months and will stipulate commencement of foreclosure action if the borrower defaults on the agreement.
Foreclosure is a serious situation that has serious repercussions. If you can, you want to avoid a foreclosure as much as possible. Bills.com is here to help. We also offer helpful guides, foreclosure FAQs, glossary terms, and other helpful tools to help you keep your home and avoid a bank repossession.
You can find more information on the Bills.com foreclosure page.
I hope the information provided helps you Find. Learn. Save
Best,
Bill
www.bills.com
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1. Posted by Breanda Cantwell on Monday 18th February 2008 12:24
What happens to the second mortgage on a short sale. Both mortgages are with the same company. The second mortgage has a collection agency hounding us all hours of the day to work out some kind of payment plan. They threathen to our wages to pay back what we owe the interest and finds. What should we do?
2. Posted by bradfordgregory on Monday 18th February 2008 13:31
if you have an agreement with the first mortgage lender for a short sale, you should force the lender to agree to include the second lien mortgage in the short sale agreement. If you are simply letting them foreclose or are doing a short sale without the lender's consent (essentially just selling the home for less than the mortgage values) then it might be true that the lender can come after you for what is left over (called a deficiency balance) and if they win a judgment then they could try to apply the judgment with a garnishment on your wages... that, however, is likely a long way off. You should first try to get the lender to agree to the short sale and if they will not, you should seek the advice of a local attorney (maybe even a bankruptcy attorney as a very credible threat to them).
3. Posted by craig markle on Wednesday 11th March 2009 15:38
we have a second mortgage differant bank from the first mortgage bank. we are current onthe firat but the second is 3-months behind and hard to pay at this time. can the second mortgage foreclose on the property even if they are not the first mortgage holder.
4. Posted by Bill on Thursday 12th March 2009 14:43
Yes, technically speaking they do have the ability to initiate a foreclosure but they will only get paid after the first mortgage is paid. So, if the current value is just enough to cover the first mortgage then it becomes impractical for them to initiate foreclosure, and then not get anything.
5. Posted by I DeBlasi on Monday 20th April 2009 10:16
I hold a second mtg on a commercial property. This mtg will be due in about a month. The borrower tells me that they will not be able to repay the balance due at maturity. What are my options? Can I contact the first mtg bank? Can I retain control of the property by keeping up the first mtg payments? Can I regain title of the property with the first mtg's consent? Thanks for your help.
6. Posted by Joey on Wednesday 22nd April 2009 03:10
You are correct in thinking that the first mortgage holder has first dibs on the property and that any action on your part must be taken either with written consent of the first lender or after paying off the first mortgage yourself, making your loan the first encumbrance. In most cases, a first mortgage holder is not going to allow a junior encumbrance take charge of the property; they want to get their money first. Given the amount of money at stake in this type of transaction, I strongly encourage you to consult with a qualified real estate attorney in your area for further guidance on how to best protect your rights in this situation. I wish you the best of luck.
7. Posted by Amber on Monday 8th June 2009 15:19
If our home is valued at less than what we owe on the first mortgage, and we can't afford our 2nd mortgage and stop paying on the 2nd, but stay current on the first, what are the consequences? 1st and 2nd mortgages are held with the same company. Reading above, it would not make sense for them to foreclose b/c they would not get any money. But does that 2nd mortgage amount become unsecured debt? If we can't settle on some sort of short payoff on the 2nd, can they sue us in the future? Any other implications that I'm missing? Thanks.
8. Posted by Bill on Monday 8th June 2009 15:54
A lot will depend on state laws with respect to balances after a foreclosure. If you stop paying on the 2nd mortgage and the lender does not initiate foreclosure, the loan will eventually be charged off but will still be secured with your home. If and when the lender finishes the foreclosure process, then the debt will be considered unsecured.
9. Posted by Cynthia Archer on Wednesday 15th July 2009 15:55
I had 2 mortgages with the same company and my house foreclosed in April. Am I still responsible for the 2nd mortgage even though I no longer own the house?
10. Posted by Mark Cappel on Wednesday 15th July 2009 17:28
Cynthia, it is impossible for me to give you a meaningful reply because the answer depends on your state's laws regarding mortgages in general, and the facts surrounding your second mortgage in particular. I recommend you take your loan documents and other papers relating to your foreclosure to an attorney in your state who works regularly in property law. The key question, as I see it, is whether your second is a recourse or no-recourse loan. An attorney's time is not cheap, but you need to understand your rights and options. Do not accept legal advice from your creditor -- their information may be wrong and self-serving.
11. Posted by Chris on Wednesday 22nd July 2009 19:50
Bill, I live in CA and own a house purchased for $850k which is now worth $650k. The first is for $680k with AHMSI, a servicer, that doesn't fit Obama's Fannie Freddie Program and will not modify the loan. The second is with WF for $170k. We have to move for our jobs and need to sell the home as it wouldn't rent for the $4,200/mth we pay now. This will be a short sale. I recently have offered WF $17k for the second as a settlement and they are now asking my wife and I for our 401k statements and assetts and debts. We have given them our bank statements, W2's from 2008, and most recent pay stubs, we are both employed and pay all bills on time. Am I required to share my 401k statements with WF, and if so can they now take action on our bank account w/ WF which has $30k in it since we offered them 10% of the $170k? We are just looking for options right now to avoid being forced to foreclose. We offered the $17k to WF as a condolence knowing that second loans in CA have no recourse, the return to us would be no negative credit reporting from WF, is this possible that they would agree to this? The problem here is that we have $300k in our 401k's and have another set of liquid assets worth $100k which we don't want to share with the lender right now. Can they see these assets anyway? Thanks for your help here....Chris
12. Posted by Bill on Thursday 23rd July 2009 14:34
I am not aware of any special privacy protections afforded 401(k) or IRA accounts. Conversely, there is no federal or state law requiring you to disclose your personal financial information just because a private party asks. However, someone can ask you to disclose your personal information as a condition of their doing business with you. The lender is trying to determine if you have money in your retirement accounts that you can tap under hardship rules. You are wise to resist dipping into those funds. Check with your 401(k) administrator to see if your employer created rules that prohibit withdrawal for hardship purposes that go beyond the regular 401(k) rules. Hope it did. Regarding the offer, why not pitch them the $17k settlement offer and see what they say?
13. Posted by Laura Pekovic on Thursday 17th September 2009 11:15
I have a 1st and 2nd mortgage on my townhome. I am able to sell it to pay off the 1st mortgage in full, but only 3/4 of the 2nd mortgage. Am I unable to sell my home if I can't pay the 2nd at the closing? Would that roll into a deficiency? Garnishment? I could probably pay off the remaining 2nd mortgage within a year. Help! This is unchartered territory.
14. Posted by Bill on Thursday 17th September 2009 13:31
It may be uncharted territory for you but there are thousands of people in line ahead of you if you wind up with a deficiency balance on your second mortgage. First, see Can a Second Mortgage Holder Foreclose if the First Mortgage is Current? to learn more about the foreclosure process if you are unfortunate enough to be headed in that direction. You can negotiate a payment plan on the deficiency balance. If you have the funds, you will probably be able to negotiate a lump-sum settlement for a fraction of the deficiency balance. Garnishment is a possibility, but only after the creditor sues you and obtains a judgment.