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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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Woman putting foreclosure sign on house | Foreclosure, mortgage and charge off
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.

Each 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

203 Comments

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  • TJ
    May, 2014
    Taylor
    I bought a home that was being foreclosed on in October 2013. There were 2 mortgages on the house. VA had the first and JP Morgan Chase had the 2nd. I went through BOA for my mortgage. JP Morgan Chase has informed me that they has foreclosed on the house and are auctioning it off in 2 weeks. My lawyer and BOA don't know what is going on and say they have never seen anything like this before. Have you ever heard of this happening before? What do I need to do? I have already contacted the attorney generals office and they are looking into it. Any info will be greatly appreciated, thanks
    0 Votes

    • BA
      May, 2014
      Bill
      We don't know enough about the details of your situation to make a useful comment. What you described is possible in theory, depending of course on your state's foreclosure laws. Your lawyer, who should know your state's foreclosure statutes and case law backwards and forwards, is your best source of information.
      0 Votes

  • JI
    May, 2014
    Joe
    I just found out my second mortgage went into foreclosure. I am recently divorced (just over a year) and haven't lived in the residence for 2½ years. My ex lives in the property. I have been in contact with the lender for the 1st mortgage and the loan is current with them. No late payments or anything. Back in 2010 we were able to do a loan modification through the H.A.M.P. program for the 1st. We received a letter from the 2nd stating something about not pursuing the loan at that point. We owe $242K on the 1st, and I guess the 2nd was sold in February of this year for $13K. And now the condo is showing as for sale on Zillow and Redfin for $299K. The 1st mortgage company was not aware of the foreclosure or sale. Should I be worried about this. Personally I want it gone and out of my name, but is there anything I should do to protect myself from financial harm? Thank you.
    0 Votes

    • BA
      May, 2014
      Bill
      I will assume your name is on the second mortgage. Consult with your divorce lawyer about this situation. You may have some recourse against your ex-spouse if there was an ordered refinance, which obviously did not occur. Talk with your lawyer about filing bankruptcy. This option removes your liability for your debts, including the mortgage(s), and provides a clean break you need to move forward financially. But there are downsides to bankruptcy, which might outweigh the upsides.
      0 Votes

    • JI
      May, 2014
      joe
      Thanks for your advice. Just one more thing, I talked to one of the realtors selling the condo and told them my story. They said that the 2nd mortgage owns the property, their name is on the title, not mine. I also just found a 1099-C showing that the 2nd debt was cancelled back in 2010. I don't know what to do. What kind of attorney do I need for something like this? I am not even sure what is going on.
      0 Votes

    • BA
      May, 2014
      Bill
      If you get deep enough into property law, the definition of ownership stops being technical and becomes philosophical. I could spend 1,000 words explaining lien theory, title theory, mortgages, and deeds of trust, but what all of this really comes down to is what rights you have to the property you occupy. Don't worry about what ownership means, and instead focus on your potential liabilities.

      IRS Form 1099-C is the most misleadingly named form we're aware of. When an original creditor issues a 1099-C, it does not mean the debt is forgiven, discharged, or no longer collectible. It is still possible for the original creditor to collect the debt from you, or for it to sell this collection account to a collection agent. Follow the hyperlink I just mentioned to learn how to handle a 1099-C.

      Consult with a lawyer who has mortgage negotiation and foreclosure experience. This is an emerging specialty, so you may need to shop around before you find one qualified.
      0 Votes

  • NF
    May, 2014
    Nate
    I have a rental that I currently owe $70K on (with ex wife), which also has a second mortgage on it. Homes that have currently sold in the same neighborhood were in numbers from $6k to $15k. The house is no longer being rented and has become harder to maintain along with major repairs being needed. Instead of fixing up the house, I would rather just foreclose on it. I don't even want to go through the hassle of short sale because it's not worth the time and effort. At the moment, I could care less about my credit for 7 years, but do I have a valid reason for a hardship? Divorced/remarried, 5 kids, Neighborhood is on the decline. Any help would be much appreciated.
    0 Votes

    • BA
      May, 2014
      Bill
      Allow me to use an aviation simile to describe the difference between a foreclosure and either a short sale or deed in lieu of foreclosure. A foreclosure is like an uncontrolled crash. A short sale or DIL is like an unpowered landing. Given the choice of being a passenger in either airplane, which would you rather take your chances in?

      You raise a good point about hardship. Perhaps your hardship is basic landlord economics: Can you reasonably expect to rent the property at the market rate and have a positive cash flow?

      Talk to your lenders about a short sale. If they say no, then you tried the unpowered landing. If you feel forced into foreclosure, talk to a bankruptcy lawyer first so you understand your options should the lenders pursue you for the deficiency balances.
      0 Votes

  • DC
    Mar, 2014
    David
    Bank had our California home foreclosed on our 2nd. Market value 500K. We owed 140K on 1st, and 225K on the 2nd, a combined total 365K. Both from the same bank. 1st a refi, 2nd a HELOC taken after purchase. Auction 1 for 450K in Feb 13 to Investor 1. Sale was cancelled in March. We were not informed. Auction 2 for 290K to Investor 2 in May 13. Both auction on 2nd. Records indicated we are the original owners until May 13, Then Investor 2 bought it and sold it to Investor 3 in Jan 14. Which auction price should be for trustee sale? Assume no cost incurred. What is our balance from the trustee: a surplus or shortage? and for how much? Are they supposed to send us foreclosure itemized statements before the sale. Are they supposed to send us summary statements after each sale?and for how much? surplus or shortage?Are they supposed to tell us the 1st sale is cancelled? and why? We are left in the dark during the whole foreclosure process, can we sued for wrongful foreclosure? If so, is there a statue of limit? from which auction date? We moved out in July. Do we still owe our bank 1st? Can the bank keep sending us a monthly bill? If the trustee said the sale generated a surplus of 80K and the bank said the 1st still outstanding and it continues to send us monthly bills. is it about right? is it about right? Is our 1st now non-existent or unsecured? If unsecured, can we ask a lawyer to send them a cease and cease and desist letter to stop sending us bills? Thanks.
    0 Votes

    • BA
      Mar, 2014
      Bill
      Mortgage servicers still have not figured out how to handle foreclosures in accordance with state and federal laws.

      You may have a cause of action against the mortgage servicer here. All of your questions are appropriate, on-point, and unanswerable without more information. Consult with a lawyer who has experience litigating mortgage issues like yours. This is an emerging specialty, and some lawyers are better at this than others.
      0 Votes

  • SB
    Mar, 2014
    Susana
    We have an 80%($390,000) and 20%(65,000) home loan.I began a modification last year when payments got difficult with our Chase bank.We were approved for a forbearance payment on Apr 2013 then in May, our account was transferred to Select Portfolio Servicing. We began our payments in June and haven't stopped ever since. On Feb 28, 2014.We received a congratulations later.Stating we were approved for the modification. We have a balloon payment of $249,999 at the end of our term. APR at 5%.And now the small loan has listed our home for foreclosure. I want to keep my home. Any advise is Welcomed.My Thanks In Advance
    0 Votes

    • BA
      Mar, 2014
      Bill
      Consult with a lawyer immediately who has mortgage experience. You may need to file a chapter 13 to stop the foreclosure, but that's an option your lawyer needs to explore.
      0 Votes