Can a Second Mortgage Holder Foreclose?

Can the lender of a second mortgage foreclose on my home if the first mortgage is current?

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Bill's Answer: Answered by Mark Cappel

If you become delinquent on your second mortgage, the lender can foreclose on your house and property.

The Foreclosure Process

The foreclosure process varies from state to state, but usually takes from two to 18 months. Generally speaking, if mortgage payments are not received within 150 days, the bank can proceed with the foreclosure process.

If the second mortgage holder forecloses, it is not automatic that the first mortgage holder will foreclose, but to protect their rights it would be foolish for the first mortgage holder not to foreclose as well. Alternatively, the first and second mortgage holder will negotiate a deal amongst themselves where one buys the interest in the property from the other so that only one mortgage holder will foreclose.

The house will be sold, the first mortgage holder will be repaid first, followed by the second mortgage holder if any funds remain.

Typically, in these situations, the sale price is less than the value of the mortgages held against it. If that is the case, then in some states the borrower could still owe an unsecured balance, which is called a "deficiency balance." The good news is that a deficiency balance (if it exists and if your lenders pursue it) is an unsecured debt (like credit card debt) that can be enrolled into a debt settlement program.

In some states (such as California) and in some circumstances, the second mortgage may be what is called a non-recourse loan. (I have written about the California recourse loans issue before.) A non-recourse loan means that the lender has no recourse to collect any deficiency balance against the borrower. Its only recourse is the security on the property itself. You will need to review your loan documents and state laws to determine if your second mortgage is a non-recourse loan. Contact an attorney in your state who is experienced in property law to determine for certain if your mortgages are recourse or non-recourse.

Second Mortgage Foreclosure

According to Bills.com readers I have spoken to and corresponded with, second mortgagees will initially take a hard-line stance in negotiations with homeowners in default. However, once the mortgagee is convinced the homeowner is sincere in their inability to repay the second mortgage and are considering bankruptcy, the mortgagee's position will soften and consider a lump-sum settlement. Readers report that some second mortgagees will settle for 10 to 30 cents on the dollar, depending on the policies of the company.

In the interest of full disclosure, it is possible legally, although not practical economically, for a second mortgagee (sometimes called a junior mortgagee) to foreclose and preserve its interests in the property. The junior mortgagee may pay off the first mortgage to preserve its own interest on the property. Because foreclosure destroys all interests that are junior to the mortgage being foreclosed, the junior mortgagee has the right to pay it off to avoid being wiped out by the foreclosure. The home equity lender may pay off the outstanding balance of the first mortgage and be subrogated to the bank's rights against the debtor.

As this is written in late 2009, it does not make economic sense for a junior mortgagee to redeem the first mortgage because property values in many areas are far lower than the mortgage balances on the attached properties. However, when property values recover the economics of this equation may reverse and we may see junior mortgagees exercise their right to redeem.

Loan Workout Plan

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.

Forbearance Plan

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.

Conclusion

Foreclosure is a serious situation that has negative repercussions on your credit score. Avoid foreclosure if you can. Consider a a deed in lieu of foreclosure or a short sale if you cannot create a loan workout or forbearance plan with the lenders.

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 this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

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Comments (123)


William P.
Covina, CA  |  May 15, 2012
We have 2 loans on our home. We have remodified our 1st mortgage ($450k) and we are current on the payments. The 2nd mortgage ($100k) has not been paid for. The private, hard-money lender of the 2nd has taken action by putting a Notice of Default. We would like to stay in the home and have contacted the lender to try to settle or refinance the $100K loan-But have not received any response. The lender of the 1st has told us it isn't necessary to pay the 2nd and we should try to negotiate the loan on the 2nd since the interest on it is so high. The value of the property is about $500k. My Questions: Can the private lender of the 2nd foreclose and require us to move if we are current on our 1st? Does the lender of the 2nd have to pay the 1st in order to foreclose on our home? Is a Notice of Default the same as a Foreclosure? Thank you, in advance for your time on this matter. William P.
Jon D.
Alta Loma, CA  |  April 17, 2012
i currently have my 1st w/ bofa i had a second w/them as well, when i modified 2 years ago they told me i no longer had a 2nd. 2 years later i have green tree calling me telling me i owe $95k on my second. there pretty aggressive wanting BS payment plan or 25% to settle and that's with looking at all my financial records. don't know what to do. I'm current on my 1st like everyone else my home is under bought it for $480 now worth less than $300. Can the debt collector garnish my check? or if i short sale will that make em go away? Again green tree claims they did not buy the account they're just handling it for bofa.
Bills.com
April 17, 2012
Your statement, "when i modified 2 years ago they told me i no longer had a 2nd" gives me pause for several reasons. Where did the loan go if you no longer had liability for it? Conversely, if the loan was forgiven and canceled, why is Green Tree attempting to collect on the loan? Do not assume anything here regarding the second — you may have liability for the loan, or you may not. Here is how you can tell: Consult with a lawyer who has real property or loan modification negotiation experience and ask him or her to research this issue.
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Jon D.
Alta Loma, CA  |  April 17, 2012
But what if I am liable for that 2nd. Besides settling the account will a short sale also make it go away. Does SB 458 apply here ? And what are the chances they'll try to garnish my check or sue me. Being that the 2nd is with the same bank. I'm still current with my 1st don't know if that matters
Bills.com
April 17, 2012
Please see the Bills.com resource Is My HELOC a Recourse or Non-Recourse Loan in California? which discusses the issues surrounding the deficiency balance in a junior deed of trust. The article uses a HELOC as an example, but the discussion is really the same for any California junior. See also California Short Sale to see a short discussion of SB 458.
Billy A.
Crossville, TN  |  March 18, 2012
My 2nd mortgage lender has accellerated my balance and it looks like it's been charged off. I'm about $20,000.00 underwater on this, so what should I do? I sent them an offer to settle the account @ 5% of the balance.
Bills.com
March 18, 2012
Because the lender wrote-off the account, the lender may choose to sell the rights to your mortgage to a collection agent, so be prepared to repeat your offer to another party. Starting at 5% is fine, and be prepared for a much larger counter-offer. Eventually, you may meet in the middle.
C H.
Arlington, WA  |  March 16, 2012
I have two mortgages and a third lien against my home:
  • $243,000
  • $42,000
  • $9,000
  • = $294,000 in loans

Our home value is $178,000 currently.

We recently went through bankruptcy due to the loss of my job, but stayed up on our payments on the mortgages. Now that we are discharged of our debts and I have regained employment after 11 months we are having trouble paying all three.

The first mortgage is an interest-only 5-year ARM we are trying to get a modification on. (Which is a pain in itself) During the bankruptcy our first and second loan were sold to other lenders but are still considered discharged.

Do you think if we stopped paying on the second and the third lien they would even think about foreclosure when we are so underwater in our value?

Bills.com
March 16, 2012
Tough to answer because it is impossible to predict how the lenders will react. Let me make up odds — if your chances of being on the wrong end of a foreclosure notice are one in five, and you receive a foreclosure notice, it will not matter you took the safe bet.

This is as far as I will go: If you decide to stop paying the two juniors, save as much as you can in a separate account. If the juniors foreclose, use the funds in the account to negotiate a lump-sum pre-trial settlement.
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Ben G.
Brookhaven, NY  |  August 05, 2012
How do the junior lenders sue if the debts were discharged in bankruptcy ?
Bills.com
August 06, 2012
In an earlier version of my reply to C.H. above, I overlooked his or her mentioning the mortgages were discharged in bankruptcy. I regret the confusion my earlier reply created.

The juniors could file a notice of default and foreclose. The bankruptcy discharge removed C.H.'s personal liability for the promissory notes built-into or connected to the home loans, but a bankruptcy usually does not strip the lien from the property. Because the loan is still secured by the property, the lender can foreclose and take possession of the property if the homeowner defaults on their payments.

There are circumstances where a chapter 13 bankruptcy will strip the lien from the property. This occurs when the market value of the property is less than or equal to the balance of the senior loan.
Greg V.
Greenfield, MN  |  February 22, 2012
we have 3 loans against our property. our home is currently worth between $365,000 and $440,000 depending on the website. our 1st loan jumbo balance is around 420,000, second fixed is $46,000, 3rd HELOC is $50,000. we realize this is not common to get but it happened. Do you know if we will be eligible for a refi through the recent settlement with the 5 banks. all loans are with different banks, but all are one of the 5 that settled. could we wrap all 3 loans into one with the holder of the 1st mortgage? not finding much detail about how even 2nd mortgages would work with this settlement. Thanks!
Bills.com
February 23, 2012
I imagine that you are speaking about the National Mortgage Settlement. The final terms of the settlement have not be published. However, the implementation will be over 3 years and the loans will be chosen by the lenders. If you are underwater, it is unlikely that you will be able to consolidate the three loans. Bills.com will post updates as the terms of the settlement are released.
Paul C.
Pasadena, CA  |  February 09, 2012
Hi, My property has two loans (1st 1,000,000 and 2nd 200,000). The home is currently worth about 900k. If I were to stop paying on the 2nd and then ultimately negotiate to pay 10-30% of the value - could I make that agreement contingent on the 2nd releasing their interest in the property and consequently keep the home? In other words, the readers you've heard from who have negotiated with the 2nd - is the 2nd lender completely out of the picture now? Thanks,
Bills.com
February 09, 2012
You can attempt to negotiate with the second mortgage holder a deal whereby they would release the mortgage and lien on the property, and close off the loan based on a negotiated settlement. If the second mortgage lender was to agree to those terms, then they would be, so to speak, out of the picture. I recommend that you speak with a lawyer regarding the terms of the agreement.
Billy A.
Crossville, TN  |  December 05, 2011
I have a 1st and 2nd mortgage w/ HSBC. 1st: $78,000 2nd: $13,000 I have a temporary Mort. Mod on the 1st and am 3 mos. behind on the 2nd. Eppraisal says my total property is worth $70,500. Zillow says $76,500. I'm from Tennessee. Because I'm underwater in this, I've been advised to stop paying on the 2nd and wait for an offer to settle. Do you think HSBC might foreclose instead? Is this a risky move on my part?
Bills.com
December 05, 2011
Life is risky, and we accept that risk. The most dangerous places for Americans are our bathrooms, kitchens, and vehicles, but that does not stop us from taking showers, preparing meals, or driving to work every day. The trick is assessing the risk of each of our behaviors.

Yes, it is risky to stop paying your second mortgage because the second mortgagee has the legal right to initiate foreclosure proceedings. The questions is, will it foreclose? Probably not, based on my observation of second mortgagees. However, that does not mean I am (or anyone else can be) 100% certain of that guess. What is the upside to stopping payment? A settlement of the second for 15-30 cents on the dollar — maybe more, maybe less. What is the downside? The potential that your second mortgagee may skip the negotiations and foreclose. Given the numbers you shared, it makes little financial sense for the second to foreclose.
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Billy A.
Crossville, TN  |  December 06, 2011
Thank you for your quick response. I do want to keep my home and DO NOT want to file BK. I think I will continue the waiting game and hope we can reach a settlement. I've read some confusing things about an impact to 1099s at tax time? Can you explain? Thanks again.
Bills.com
December 06, 2011
Tax issues come into play if you reach a settlement wtih your lender and some of your debt is forgiven. Please read about the Mortgage Forgiveness Debt Relief Act and ask any follow-up questions on that page.
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Billy A.
Crossville, TN  |  December 10, 2011
I have another question please. When HFC set my loan up (both 1st and 2nd) they had me sign it,and recently I noticed that my name "Billy" was on the documents, Not "William David" which is my legal name. Would that make a legal difference? Thank-you.
Bills.com
December 10, 2011
The answer to your identification question depends on your state laws. Consult with a lawyer in your state to learn if there is any merit to your argument that you have no liability for the loan because the lender used your nickname instead of the name that appears on your birth certificate. I do not see much of an argument here, but again, this is a question best asked of a lawyer who is familiar with your state laws.
Joan S.
Alpharetta, GA  |  November 30, 2011
I have 1st ($79,000) and 2nd mortgage ($26,788) and will be unable to make payment soon. If I file suit for bankruptcy, will I have to pay 2nd mortgage?
Bills.com
November 30, 2011
Depends on the chapter of bankruptcy for which you qualify. Chapter 7? Yes, you still have to pay both mortgages or risk an eventual foreclosure. Chapter 13? No, the lien will be stripped and you will not have personal liability, nor will the second be able to foreclose. Consult with a bankruptcy lawyer to learn more, and which chapter applies to you.
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Azelda R.
Los Angeles, CA  |  February 08, 2012
i file a bankruptcy last year and it was final discharged in july 2011. i received all 3 credit reports and my equity line of credit was included in the bankruptcy. my first mortage is current never late but i just realize by the credit reports the equity line of credit shows 0 balance. my question am i still obligated to paid this debt if i don;t can they forclose my home and my first mortage i have never been late.
Bills.com
February 10, 2012
Your bankruptcy lawyer should have explained the following: A home loan consists of two parts
  1. A promise by the borrower to repay loan. This is sometimes called a "note."
  2. A legal claim to the property if the borrower defaults.

A chapter 7 bankruptcy strips the note — it removes the personal liability to repay the loan. That is why credit reports stop showing mortgages upon a discharge.

Do you still reside in the property in question? If no, then do not pay any mortgages on the property because you have no personal liability for the notes. If you reside in the property, then pay the first mortgage as usual, and consult with your lawyer about the second. Depending on your equity in the property, you may want to negotiate a lump-sum settlement on the second.

Patricia S.
Owings, MD  |  November 14, 2011
We have a 1st and 2nd mortgage. The first is doing well but the 2nd mortgage is currently 96 days late. We lost one income and I haven't been able to find another job for 2 years. The 2nd mortgage informed us that they will start proceedings if 2 payments are not in the office by 11/18/11. The problem is we can't pay two payments but can make one payment. We are don't know what to do because our house doesn't cover both mortgages if we sell (just enough for the 1st mortgage). We don't want to foreclose but we don't have money to pay out of pocket "if" the house sells. Please help!
Bills.com
November 15, 2011
Yes, a second mortgage can foreclose, although any proceeds will first be applied to the lender in first lien position, most likely the first mortgage holder. If you wish to avoid foreclosure, then try to negotiate with the lender. Their position is really dependent on your financial situation, beyond that of the property. The less assets and income you have will make it less desirable for the second mortgage holder to foreclose.
Lori B.
Rancho Cucamonga, CA  |  November 09, 2011
We were in default with our first mortgage but have now become current after over a year of struggling. During that time the holder of our second mortgage charged-off our account but has not started any kind of foreclosure proceedings such as filing a default with the county clerk (We are more than eight months behind in payments). We stopped getting statements from them shortly after the charge-off, and are now simply getting collection letters which state that they want the full balance of the loan (over $100,000) or they will consider taking "legal action". They amount keeps going up so we assume they are still charging us interest. We have been in contact with them and have tried to work out payment arrangements, but they have been dissatisfied with our requests and thus no agreement was ever reached. My question is this...If things continue as they are with this company, what "legal actions", other than filing a default (foreclose) and making negative reports to the credit reporting agencies, can they take? Essentially, since this is a second mortgage, can they choose not to foreclose and instead take us to court to recoup the full amount of the loan? (FYI: We live in California, and our second would not be considered one of the Non-recourse types since we originally got it to consolidate some debts. Also, if our house was ever sold it would not get enough to pay off both loans.
Bills.com
November 09, 2011
It is possible for the lender to file a breach of contract lawsuit against you and pursue you for the amount owed.

Consult with a bankruptcy attorney to see if you can discharge the debt you owe in a Chapter 7. If you can do so, you can use that as leverage to negotiate a settlement that the lender is reluctant to consummate with you now. If you can't qualify for Chapter 7 and the lender sues you, you could end up facing wage garnishments and bank levies, consistent with the collection laws in your state.
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