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Foreclosure on Second Mortgage

I am current on my first mortgage but not on my second. Will the second foreclose? What are my options?

I am 67 years old; purchased this condo I live in in 2005. I owe $280,000 on the first mortgage [mortgage is current; thanks to help for re-financing from NACA]; owe $96,000 on second mortgage. I have exhausted my 401(k) to make payments on both mortgages. I have worked over a years with Flagstar Bank to attempt to re-finance the 2nd mortgage -- to no avail. I made 3 forbearance loans, but once that was one, got the same response, "Sorry, we can't help". I received a call from a collection agency this morning, wanting to help -- either lower the amount owed or lower the payment. I want to retire -- get out of here and go away, never looking back at the horrific investment. What can this collection agency do to me? They cannot foreclose, can they? The property assessment from Fairfax County is $252,000. What can I do?

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Highlights

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

Your question contains several issues that do not lend themselves to brief, easy answers. Allow me to handle your brief issue first.

Property Assessment

A tax assessor's value of the property is important for tax reasons, but is generally far lower than the market value of the property. The market value of your property is determined by its location, location, location, plus its amenities such as the number of bedrooms, bathrooms, square footage, size of the garage and lot, and overall condition of the house and grounds.

You can estimate your house value by comparing your property to others in the neighborhood. In the real estate business, this is known as "looking at comps." The term "comp" is short for "comparisons." An experienced real estate broker or agent keeps comps in his or her head in the same way a baseball fan keeps current statistics of his or her team memorized.

For those of us who are not real estate agents there is Zillow.com. Zillow correlates public information about properties in the United States. Zillow uses sales prices, appraisal information, and other data on comparable homes in a given area to estimate the value of a home.

Look at Zillow to determine the estimated house value.

Foreclosure on Second Mortgage

If you are current on your first mortgage and become delinquent on your second mortgage, the second mortgage lender (also called a "junior mortgage" holder) has the legal right to foreclose on your house and property. However, it may not do so because of economic reasons, which I will discuss below.

Here is the good news: Lenders do not like to foreclose on mortgages because foreclosure offers a poor economic return. Lenders foreclose only as a way of limiting losses on a defaulted loan.

Generally speaking, when homeowners get behind on mortgage payments, lenders will work with them to bring the loan current. 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 made consistent timely payments and had no serious defaults, the lender will be more receptive than if the person has a record of unexplained late payments. Homeowners falling behind in payments or who know they are likely to do so in the immediate future should contact the lender right away to discuss alternative payment arrangements.

Foreclosure Process, Briefly

Either the senior or junior mortgagee can initiate a foreclosure. The foreclosure process varies from state to state, but generally takes from two to 18 months. It all depends on the terms of the loan and local state laws. However, normally if mortgage payments are not received within 150 days, the bank can proceed with the foreclosure process. The junior mortgage would be repaid after the senior mortgage is paid in full.

In fact, if the sale price is less than the value of the mortgages held against it, then in some states the homeowner could still owe an unsecured balance called a deficiency balance or deficiency judgment. The good news is that this new deficiency balance (if it exists and if your lenders pursue it) is an unsecured debt that may 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. 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 junior 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.

Junior Mortgage Foreclosure

According to Bills.com readers I have spoken to and corresponded with, junior 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 junior mortgage and are considering bankruptcy, the mortgagee's position will soften and consider a lump-sum settlement. Readers report that some junior 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 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 early 2010, 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.

Alternatives to Foreclosure

An agreement between the homeowner and mortgagee 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

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.

Making Home Affordable Refinance Program

If an Adjustable Rate Mortgage (ARM) reset or drop in income are causing the distress, the federal government home loan programs might be able to help. The Making Home Affordable Refinance Program (HARP) allows borrowers with mortgage debt of 80 percent to 125 percent of the home value to renegotiate the terms of their loan, in some cases without paying additional PMI.

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. See also the HUD page Avoiding Foreclosure. To learn more about negotiating a debt, read the Bills.com article Debt Negotiation and Settlement Advice.

Making a Deal

Make an offer to the junior mortgagee to settle the debt for 10 cents on the dollar and take the negotiations from there. Explain that if there is a foreclosure the junior will get nothing in the sale of the property. Any deficiency judgment they get will be met with a bankruptcy. You have leverage in this negotiation -- use it.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

11 Comments

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  • KG
    Feb, 2011
    Katrina
    My husband is the primary borrower on a 1st mortgage for the home his ex-wife lives in, which is to be sold and the profits split in two years. She is to make the mortgage payments, but is now 5 months behind. That first mortgage has only $60,000 left on it, and the house is valued at about $230,000, conservatively. We just learned she also took out a second mortgage for $65,000. The court is to award title back to my husband if she is more than three months behind. What can we do if she has not/does not make payments on the second mortgage that is only in her name? We tried, and cannot get access to that loan information, since it is in her name. We hope to get title awarded in the next couple months, and then try to sell the house. In the meanntime, the payments are not being made. Help!
    0 Votes

    • BA
      Feb, 2011
      Bill
      My first and last thoughts are a recommendation for your spouse to consult with a lawyer who has family law experience regarding this matter. I commend the judge and the attorneys involved for putting a deadline on the house sale. Now to your questions: It is impossible for me to say whether the divorce decree/contract/agreement contemplated the wife to get a second mortgage on the property. If it did, then the answer to your question is in black and white. If not, the two parties are either going to negotiate a resolution to the second out of court, or ask a judge to decide the matter. In my opinion, which is meaningless, it would be fair for the wife to deduct the balance of the second from her share of the equity when the house is sold. It would also be fair, in my humble meaningless opinion, for the delinquent mortgage payments to be deducted from her share, too.

      If the house is threatened by foreclosure, and I cannot image it would not be at this point, the husband here should consult with an attorney about filing a motion with the family court to compel the wife to take some action: Either sell the property immediately, sign a quitclaim deed to relinquish her interest in the property to the husband, or to become current on both mortgage payments.
      0 Votes

  • BA
    Jul, 2010
    Bill
    Both the first and second mortgages (or deeds of trust depending on the state where the property is situated) are encumbrances on the property. The first (or senior) is the first in line for claims against the property. Subsequent mortgages follow the first. My first recommendation is to contact your county bar association when shopping for an attorney.
    0 Votes

  • 35x35
    Jul, 2010
    Vero
    Always remember the 2nd loan mortgage is called a second for a reason its a 2nd, the the first mortgage has a lien on your house. 2nd mortgages are suppose abide by the law but don't. But their are lawyers that can help you. E-mail legal aid and congressmen. and they direct you to the correct people.
    0 Votes

  • BA
    Apr, 2010
    Bill
    I am an optimistic person, not prone to cynicism, and recognize that banks will charge whatever fees and gamble on insane derivatives they do not understand to make money. I refuse to believe Chase is knowingly going to foreclose on your property given your history of paying the modified mortgage payment on time. However, the mortgage servicers are overwhelmed, and in my observations making bizarre mistakes with foreclosure and mortgage modifications. I do not mean to alarm you, but your safest course of action is to assume that Chase has rejected your modification without telling you, and is about to foreclose. But regardless of what I believe or of Chase's outward behavior, assemble your evidence, write the narrative I suggested earlier, send the letter to the top of Chase's mortgage business so that if Chase is about to make a huge blunder with your file you have ample evidence to show a jury that you alerted Chase of its negligence early on, and that despite your warning Chase violated its contract with you to renegotiate the mortgage.

    Regarding your second question, junior mortgagees have different policies, and I think 10-15% is a great starting point. Some readers have reported that some junior mortgagees will not settle for less than 30%.
    0 Votes

  • 35x35
    Apr, 2010
    James
    Understanding that you cannot speak specifically for Chase/ with all your experience what do you THINK Chase is doing regarding the aforementioned. And from your experience is there ANY chance we may still be able to pay 10-15% and rid the heloc completely?
    0 Votes