Consequences of Default on a Second Mortgage

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READER QUESTION

What are the consequences if I do not pay the second mortgage but stay timely on the first?

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Bills.com Resident Expert
Dec 12, 2011
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BILL'S 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 program

Here 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 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 this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

Comments (30)


Avatar
Paul L.
Round Lake, IL  |  March 11, 2011
I am in Illinois. I have 1st Mortgage balance of $224000 and 2nd mortgage(home equity) balance of $68000 I have paid all my bills on time and can continue to do so. My Equity line is a variable load just a bit above prime. The interest right now is about $190 a month. I am not able to pay down very much of the balance each month. At this rate it'll take me 15years to pay it off. My current mortgage is 30yr fixed at 5.125 (no PMI), I am 7 years into it. My worry is the interest rates climbing to the point that I wont be able to afford paying the home equity. Since my home is valued around $260-275 refinancing is probably not an option, and If I do refinance the pmi rates are too high to afford comfortably. Do I refi? Do I walk away? Do I just keep going until the wheels fall off? It seems the only way to get help or negotiations going, is to default on the loans. Any advice is helpful. Thank you
Avatar
Bills.com
March 11, 2011
My general advice is for you to maintain paying on your loans while you are able to do so. I understand your concern about a rise in the variable interest rate on your HELOC, but until rates actually rise that concern is a future worry. You are correct that refinancing is not a likely option, if you are underwater on your home, though you can look into the FHA Short Refinance program that requires you to owe more on your home than it is worth.

There are a lot of Americans in the same position as you. There is talk that the government may introduce a program that compels lenders to reduce the principal balances on mortgages. I think you should wait to see what develops along these lines, as long as you can maintain your payments.

At any time that you are reaching the point where payments can no longer be made, then you should review the following articles:
Avatar
Pep R.
Azusa, CA  |  February 13, 2011
This is an investment property located in Fontana, CA where the value is approx. 138 to 148000. I am current on the 1st with a balance of 52000. I have a 2nd with PNC where I owe 272000. I am behind by close the the 90 days allowed before it goes to what they call the "recovery dept." What are my alternatives. Are they likely or unlikely to issue a judgment if I short sale or give back the deed. I have made them a cash offer of 35000. and I am thinking of making a last offer of 50000. What are your thoughts on how a bank might react?
Avatar
Bills.com
February 14, 2011
If you are Bill Gates, the mortgage servicer is going to laugh at a $35,000 or $50,000 offer to settle a $272,000 second mortgage. On the other hand, if you submit complete and accurate financials to the servicer that indicate that $50,000 is all it will ever see from you, and that a Chapter 7 is awaiting you if it tries to collect the deficiency balance after a short sale or foreclosure, then it will see a $35,000 or $50,000 settlement offer as a terrific bargain.

Your question about the servicer pursuing you for the deficiency following a short sale is a tough one because the mortgage servicers follow their own secret, ever-changing policies for this question. The answer to your question can be found in the short sale contract offered you.
Avatar
Bernice R.
Azusa, CA  |  February 19, 2011
Would I have to complete the short sale or give back the deed in order for this to work or could I just make the offer and if they didn't accept it threaten to file Chapter 7
Avatar
Bills.com
February 21, 2011
Do not threaten to take legal action idly. Do you qualify for Chapter 7? Are you prepared to file? Do you understand the short-term and long-term costs and benefits? A smart negotiator will suss-out these facts from you to determine if you are serious about a bankruptcy option or are just blowing smoke. If you are serious, the negotiation may become fruitful. If the negotiator thinks you are lying about filing, then you will get nowhere.

The time to discuss bankruptcy is when you are negotiating the terms of the short sale. If the terms are one-sided in the mortgage servicer's favor, then raise the bankruptcy issue. Obviously, consult with a lawyer who has bankruptcy experience to learn more. Ask if he or she has experience negotiating short sales. If so, bring him or her into the negotiations.
Avatar
Pep R.
Azusa, CA  |  February 21, 2011
Thank You so much for your wisdom, I think it is time to hire an attorney
Avatar
Dean D.
Highlands Ranch, CO  |  December 29, 2010
I have a second on my home in CA from the previous owner and I'm current on both of my monthly payments. A balloon payment is due on the second this year. The house is not currently worth the amount due on the first mortgage. What recourse does the previous owner have if I don't pay the balloon payment or offer to pay only a portion?
Avatar
Bills.com
December 30, 2010
The recourse available to your second mortgage holder depends on the language of your agreement and whether or not your second mortgage proceeds were used to purchase the home. Your second mortgage holder may have no recourse to collect from you, if you default. I suggest that you speak with an attorney. Have him or her review your loan paperwork. Once you know what recourse the mortgage holder has, you can consider negotiating a reduced pay off with the mortgage holder.
Avatar
Bills.com
March 23, 2010
I encourage you to speak with your bankruptcy attorney and have this person advise as to the laws that apply to you and your second mortgage.
Avatar
Robert C.
March 22, 2010
We filed a Chapter 7 last year. Our home is currently worth $170,000. We are current with the first mtg and owe $225,000. We have not made a payment since Nov. 2008 on the second that we owe $80,000. Under Arizona law, how many years does the second have to foreclose before the statute of limitations runs out?
Avatar
Bills.com
March 13, 2010
It would be helpful to know more about the facts in your situation. I dislike the idea of a you using your savings at this point in your life when you are nearing retirement age. Let us assume you have little other retirement savings. Cutting what you have for retirement in half gives you a very small cushion to work with as you move into retirement. Also, I would be very curious to know how the property is titled and if one or both spouses are on the mortgage. In an ideal situation, Spouse A is on the title and mortgage. Spouse B can take the entire amount of the savings into his or her name. Spouse A can declare bankruptcy leaving Spouse B the financial lifeboat. However, I have no idea if both of you are on the title or mortgage. If so, start negotiating with the junior mortgage representative now that if he or she doesn't accept a 15 cents on the dollar offer to settle the junior mortgage you are prepared to file for Chapter 7 if the junior mortgagee files a judgment. If you file a Chapter 7 the junior will get little or nothing if they force your hand. Now, that may not actually be the case if the $60,000 in savings is in a savings account, but it is true if it is in an IRA, 401(k), 403(b), or equivalent retirement account. Bottom line: You have some options, and I discussed a few. Consult with a Georgia attorney who has experience with bankruptcy to learn more options and the specifics of those I discussed.
Avatar
Denise A.
March 13, 2010
We are in middle of short sale with chase. 517,000 owed on first/ 93,000 unsecured on second/same lender. Offer on table is 510,000. Neither will release us from loan personally,only release liens. First is now giving percentage to second along with realtor coughing up 5,000 commission to second to make deal work, also we are offering cash now to bring deficiency on second down by another 30,000. Bottom line is we do pass the means test for chapter 7. If second does not release us from loan personally,is it better to just go along with this deal and wait for a judgment from second and then file bankruptcy? and if so what would be a realistic percentage the second could in fact get from us after deal closes? Would it be full amount of deficiency or would it be more like 20 to 30 cents on dollar? Right now the second would be getting about 40 cents on dollar if they agree to releasing us personally. Should we just let it go and agree to this short sale and not pay anything to second and take our chances and if judgment comes after deal closed then deal with filing chapter 7? We live in Ga a recourse state. If we give them 30,000 cash now that is 50 percent of our life savings. Husband is 63 and unemployed.
Avatar
Bills.com
December 06, 2009
I will not second-guess your local attorney's opinion regarding which mortgage is in the first position. I think you are wise to consider either a short sale or deed in lieu of foreclosure. Do whatever you can to avoid a foreclosure.
Thanks for your feedback!

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