Consequences of Default on a Second Mortgage

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

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?

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  • Review how the foreclosure process works.
  • Understand the difference between a recourse loan and a non-recourse loan.
  • Examine the alternatives to foreclosure.

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

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  • 35x35
    Mar, 2011
    Paul
    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
    0 Votes

    • 35x35
      Mar, 2011
      Bill
      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:
      0 Votes

  • 35x35
    Feb, 2011
    Pep
    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?
    0 Votes

    • 35x35
      Feb, 2011
      Bill
      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.
      0 Votes

    • 35x35
      Feb, 2011
      Bernice
      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
      0 Votes

    • 35x35
      Feb, 2011
      Bill
      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.
      0 Votes

    • 35x35
      Feb, 2011
      Pep
      Thank You so much for your wisdom, I think it is time to hire an attorney
      0 Votes

  • 35x35
    Dec, 2010
    Dean
    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?
    0 Votes

    • 35x35
      Dec, 2010
      Bill
      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.
      0 Votes

  • 35x35
    Mar, 2010
    Bill
    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.
    0 Votes

  • 35x35
    Mar, 2010
    Robert
    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?
    0 Votes

  • 35x35
    Mar, 2010
    Bill
    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.
    1 Votes

  • 35x35
    Mar, 2010
    denise
    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.
    0 Votes

  • 35x35
    Dec, 2009
    Bill
    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.
    0 Votes

  • 35x35
    Dec, 2009
    Ron
    I am in Minnesota. Have a first and second mortgage. Had a first mortgage before with HomEq, and 2nd with HSBC. Household Financing (member HSBC) refinanced the HomEq loan. An attorney told me the HSBC mortgage (lower $) would by law fall into place as the new 1st mortgage because it existed prior to the refinance, and the Household (HSBC) (larger $)loan would now be the second mortgage. In talking with the two mortgages they claim HSBC is the second yet, and Household HSBC the first. Now because of some loss of income,etc., I have been unable to pay. I am 4 months behind on HSBC and 5 months behind on Household HSBC. What advice would you have for me ? Planning to try short sale, have real estate salesman ready to proceed if they agree. They will not work out payments I can make with them. They said they would consider pay off for less money but my credit is bad now, etc. Had a bankruptcy in 2006 and kept the house then but now wish I had not. Two mortgages are over $325,000 together, home value about $240,000 to $250,000 now. Any comments what I can do ?
    0 Votes

  • 35x35
    Sep, 2009
    Bill
    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.
    0 Votes

  • 35x35
    Sep, 2009
    Laura
    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.
    0 Votes

  • 35x35
    Jul, 2009
    Bill
    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?
    0 Votes

  • 35x35
    Jul, 2009
    Chris
    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
    0 Votes

    • 35x35
      Jan, 2011
      Rich
      Kind of late, but I wouldn't provided any information to WF, unless they release a statement as to their intent, they may be building a case against you, Legal systems typically leave 401K alone - legal tax issues vesting etc. although that is a legal tool which allows consumers to release cash flow to protect from foreclosure. If it comes to a court decision, all your bank accoutns are to be noted, retirement type accounts again are typically looked out 2ndly because of effects unless loans have been secured from 401K account which makes it less secured
      0 Votes

  • 35x35
    Jul, 2009
    Mark
    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.
    0 Votes

  • 35x35
    Jul, 2009
    Cynthia
    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?
    0 Votes

  • 35x35
    Jun, 2009
    Bill
    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.
    0 Votes

  • 35x35
    Jun, 2009
    Amber
    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.
    0 Votes

  • 35x35
    Apr, 2009
    Joey
    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.
    0 Votes

  • 35x35
    Apr, 2009
    I
    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.
    0 Votes

  • 35x35
    Mar, 2009
    Bill
    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.
    0 Votes

  • 35x35
    Mar, 2009
    craig
    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.
    0 Votes

  • 35x35
    Feb, 2008
    bradfordgregory
    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).
    0 Votes

  • 35x35
    Feb, 2008
    Breanda
    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?
    0 Votes