Second Mortgage Foreclosure

Can the second mortgage holder foreclose if the first mortgage is still current?

Can they foreclose on your home if you are in default on your home equity loan but current on your primary mortgage?

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Bill's Answer
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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.

Thank you for your excellent question about how a delinquency on a second mortgage affects your home and the chances that a foreclosure may result.

If you are current on your first mortgage and become delinquent on your home equity loan (which is a form of second mortgage), the second mortgage lender 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 first or second 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 second mortgage would be repaid after the first mortgage is paid in full.

Deficiency Balance

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.

Recourse Loan vs. Non-recourse loan

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 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.

ach state legislature created unique foreclosure and anti-deficiency laws. Follow the links just mentioned to learn the foreclosure rules relevant to you.

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.

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 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. Editor’s note: On October 24, 2011, the FHFA announced changes to HARP that remove the 125% LTV restriction for fixed-rate loans. See the Bills.com resource HARP Mortgage to learn about the loosened requirements.

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.

Debt distressing you? The Bills.com Debt Coach is a no-cost online tool that will analyze your debts and show you the options available to resolve them and the costs and benefits of each.

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.

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

Best,

Bill

Bills.com

185 Comments

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  • CA
    Feb, 2013
    Connie
    I owned a California property that I purchased in 2007. The first mortgage was for around $360k and the second mortgage was for $80k. I stopped paying on both mortgages in 2009 and the first mortgage has reported this as a bad debt and later on as " charge off". The second mortgage company reported on the credit bureau that the credit grantor has reclaimed collateral to settle defaulted mortgage in March 2010.The property was sold as foreclosure in 2011 for 152 k! Just now, I received a notice that the second loan was sold to another loan servicing company and that the value of the loan is now up to $113k! Is this legal? Am i still liable for the second loan when obviously, they have actually sold the property? What steps do i need to take to clear this up with this new firm? I am afraid of calling this new firm because i might reset the clock again.
    0 Votes

    • BA
      Mar, 2013
      Bill
      I can't answer your question without knowing if either or both of your home loans were purchase-money loans. See the Bills.com article Is My HELOC a Recourse or Non-Recourse Loan in California? for an analysis of the issues you face. After reading the article I just mentioned, please ask any follow-up questions you may have on that page.
      0 Votes

  • RB
    Jan, 2013
    Raquel
    If I had a second mortgage, which was really my down payment for buying the house, and the house was foreclosed on in California. Can I dispute that the foreclosed date and charge off date to match? The first is showing 11/10 and the second is showing as 3/11.
    0 Votes

    • BA
      Jan, 2013
      Bill
      Foreclosure and charge-off are two separate events from both accounting and legal perspectives.

      Foreclosure occurs when the lender of a secured property loan exercises its right to seize a the property from a delinquent borrower. The property is auctioned, and any deficiency balance is collected from the borrower, if allowed by state law. If the borrower refuses to pay the deficiency balance, then the lender is required to move the debt from its accounts receivable ledger to the bad debt line on its general ledger. This action is called charging-off or writing-off a debt.

      Here, the foreclosure occurred in November, and the charge-off occurred 4 months later, which appears to be a correct timing for these two events.

      There is a twist to your question, however. You mentioned this is a California property and described the second mortgage as a purchase-money loan. In California, a home loan lender may not collect a deficiency balance on a purchase money loan. Your question implies the foreclosure and write-off date should be the same because California law prevents the lender from collecting the deficiency balance from the borrower. This is a compelling argument. However, I have not seen this tested in a California court. (Readers, please comment below if you know of any cases that have.) Your best bet is to dispute the debt. If this is not satisfactory, consult with a lawyer in California who has civil litigation experience, and discuss whether you have a cause of action against the lender and the consumer credit reporting agencies for libel.
      0 Votes

    • RB
      Jan, 2013
      Raquel
      So, would the clock start clicking from my foreclosure date or charge-off date to buy another home?
      0 Votes

    • BA
      Jan, 2013
      Bill
      In terms of meeting a lender's requirements for buying a home, the clock will start from the date of the foreclosure. How this will affect your next home purchase depends, in part, on what kind of loan you apply for. You have to wait for three years, post-foreclosure, to get an FHA loan, two years for a VA loan, and seven years for a loan backed by Fannie or Freddie (though there are exceptions that can reduce that time-frame to three years).

      See the Bills.com resource Mortgage After a Foreclosure to learn what steps to take to get yourself approved after a foreclosure, and the rules lenders follow.
      0 Votes

  • JR
    Oct, 2012
    Javier
    Hi, I purchased a home in 2006 with an 80/10. My first loan is with Wells Fargo for 306,000 and was modified in 2009. My second is with Suntrust for 38,000 at 9.25%. I live in California and the current home value is about 218,000. I have been working with suntrust to try to get the second modified because i could no longer afford my mortgage but they won't help. I am not behind yet but will be soon and I am wondering what my options are? I am also wondering if the modification turned my loan into a recourse loan on the first lien and if that would affect the second lien? Thank You!
    0 Votes

    • BA
      Oct, 2012
      Bill
      If you can't continue to make payments on your second mortgage, your options are to try to work on modifying the loan (as you've been doing) or default.

      I believe that modifying your loan did not turn your non-recourse loan into a recourse loan. I also believe that the second loan would remain a non-recourse loan, if it were originally one.

      Given the fact that the stakes are so large, the only prudent course is to speak with an attorney, have the attorney examine your modification, and give you an authoritative answer.
      0 Votes

  • SM
    Sep, 2012
    stacey
    Need advice.... I currently have two mortgages one for 85k and the second for 17k.. the first mortgage was modified and my payment dropped 100bucks however i became deliquint again and the first mortgage company is working with me. the second mortgage is current.. My home is a double wide and isnt worth but maybe 65k if i am lucky.. how can i keep my home and get away from that second mortgage? i cant afford both mortgage payments ...
    0 Votes

    • BA
      Sep, 2012
      Bill
      Consult with a lawyer in your state who has bankruptcy experience about a chapter 13 bankruptcy. In the circumstances you describe — the balance of the senior loan exceeding the market value of the property — a chapter 13 will "strip" the lien from the junior loan. A chapter 13 will also set your creditor payments for the duration of the bankruptcy plan at a level you can afford.

      Bankruptcy may turn out to be not your best option, but it is worth your consideration. To learn your other options, access the Bills.com Debt Coach for a no-cost, no-nonsense, online analysis of your debt resolution options.
      0 Votes

  • BS
    Sep, 2012
    Bobby
    I currently have 2 mortgages. 1st @ $80K, 2nd @ $171K. My question, is there any possibility of getting the second mortgage stripped in a Chpt. 13 as it is a higher amount that the first. My home is valued at around $200K. I filed a Chpt 7 back in 2010. Please help! We are falling behind on the second, but we are current on the first. Thanks!
    0 Votes

    • BA
      Sep, 2012
      Bill
      Bobby, I don't have enough facts to understand your situation and I can't give you legal advice.

      Are you saying that you did not include your 2nd mortgage in your Chapter 7 BK? I recommend that you speak with a bankruptcy attorney.
      0 Votes

    • BS
      Sep, 2012
      Bobby
      Hi again, just to clarify. The second mortgage was included in the chapter 7 bankruptcy; however in order for us to keep the property and avoid possible foreclosure we re-affirmed the second mortgage (and first as well). The second mortgage (held by Citimortgage) was also restructured to give us a lower payment, which is still unfortunately a large amount for us to pay every month. At this point I am wondering if I can file for a chapter 13 to have the second mortgage stripped or am I better off trying to get a refinance and consolidate both mortgages. Thanks!
      0 Votes

    • BA
      Sep, 2012
      Bill
      I am curious to learn if the mortgage lender(s) threatened to foreclose if you did not reaffirm the mortgages. In many cases, people who file a chapter 7 never reaffirm their mortgages and continue to pay the contracted amount without foreclosure.

      A chapter 7 followed by a chapter 13 is known informally as a "chapter 20" bankruptcy (7 + 13 = 20). A chapter 13 will, as you mentioned, strip the lien from junior mortgage(s). A chapter 13 gives a person extra time to pay-down any shortfall in your mortgage or vehicle loan that occurred during a chapter 7, or to pay-down debts not eligible for discharge under the Chapter 7, such as some types of tax debt. Consult with your bankruptcy lawyer to learn more about a chapter 13.
      0 Votes