Can a Second Mortgage Holder Foreclose?

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READER QUESTION

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

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Bills.com Resident Expert
Feb 09, 2012
HIGHLIGHTS
  • Default on your second mortgage, can lead to foreclosure.
  • Try to work out a forbearance plan.
  • Attempt a short sale or deed in lieu, before foreclosure happens.
BILL'S ANSWER

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

Comments (108)


Avatar
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,
Avatar
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.
Avatar
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?
Avatar
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.
Avatar
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.
Avatar
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.
Avatar
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.
Avatar
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?
Avatar
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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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!
Avatar
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.
Avatar
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.
Avatar
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.
Avatar
Janice G.
La Quinta, CA  |  October 25, 2011
Hello,We were late on our payments on our first, so the private party who has our 2nd paid them and put a foreclosure on us. We are now up to date with the first. My question is since we have a second with the private party, who paid up our lates, keep collecting from us monies on the $35K even though it is not part of the foreclosure. The foreclosure peopl told us that he is not allowed to take any money from us during these 90 days? What is the law on this? Thanks, Janice
Avatar
Bills.com
October 25, 2011
The facts in your message confuse me, and I suspect there are relevant facts that would be revealed only after an in-person interview and review of the written documents alluded to. Consult with a lawyer in your state who has experience litigating foreclosures. You need more help than someone can provide via e-mail and Web postings.
Avatar
Lori S.
Elkhart, IN  |  October 10, 2011
We filed Chapter 7 BK which was final in March 2011. We were going to reaffirm both 1st and 2nd mortgages but decided not to do so after receiving the reaffirmation agreements. 1st was initiated with a local bank but sold a year later to Fannie Mae. It is still serviced by original bank and is currently at $89,000. 2nd is with Chase at $43,000. We just had a market analysis done by a realtor which indicated a listing price of $109,000 - $114,000 based on area comps. We have continued to make payments on the first but stopped making payments on the 2nd in February based on the advice of our BK attorney. We received a letter from an attorney for Chase stating that while we no longer have personal liability they still hold a valid lien against our property. Can we make a settlement offer to Chase and if so will they release their lien on our property? How does the agreement have to be worded so that Chase has no further legal attachments to the property? If we offer them 10 cents on the dollar is this an acceptable settlement amount?
Avatar
Bills.com
October 10, 2011
You are on the right track. Your most prudent course of action is to either involve a lawyer in the negotiations, or negotiate yourself and ask your lawyer to review the proposed contract before you sign so that you understand all of its terms and conditions. In general, there is nothing tricky about a settlement agreement. Be sure the contract states the amount both parties agree to is for a final settlement, and that the lender has no recourse or option to create a collection account or balance due for the forgiven / canceled amount.
Avatar
Tom E.
Chicago, IL  |  September 24, 2011
We have a 1st and 2nd mortgage with the same lender. We are current on the first mortgage and we are in the middle of loan modification process. We have not paid on the 2nd mortgage for the last four months due to financial problem. The lender is now telling us that our house is going to be on Foreclosure due to delinquency. Can the lender foreclose on us? If we are modifying the first loan, are we obligated to pay while it is in modification process? We are thinking about just paying for the 2nd mortgage for now and not on the 1st mortgage. Can you provide an advice for us?
Avatar
Bills.com
September 26, 2011
In general, if you fail to pay the monthly amount you agreed to on time, any mortgage or deed-in-trust lender has the right to foreclose. Consult with the negotiator who you are working with on the modification. If the negotiator tells you to stop paying your mortgage as a condition to complete a successful modification, then make sure to get that statement in writing. Consult with a lawyer to discuss your rights if the mortgage servicer is simultaneously telling you to stop making your monthly payments and threatens foreclosure.
Thanks for your feedback!

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