Second Mortgage Foreclosure

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

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Woman putting foreclosure sign on house | Foreclosure, mortgage and charge off
Bill's Answer: Answered by Mark Cappel

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.

Wise Advice 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.

Tip 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

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Comments (195)


David C.
March 16, 2014
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.
Bills.com
March 28, 2014
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.
Susana B.
Los Angeles, CA  |  March 06, 2014
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
Bills.com
March 10, 2014
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.
Deanna Z.
Niles, MI  |  December 07, 2013
Need a second opinion..we have a first mortgage balance of $120.000, current on first. Second mortgage was for $40,000 and defaulted a couple years ago and then we filed bankruptcy. I have a collection company that has bought my second mortgage and put a foreclosure on my home. My sheriffs sale is in 5 days...I have contacted my attorney and they seem to think we should call their bluff and let it ride..they were wanting me to negotiate a contract of $67,000 ,$1300 down and $338 a month..I feel like I'm getting bullied into an agreement I can't afford!! My home isn't even worth what owe..what are my rights here?? The place I'm dealing with claims to be "mortgage relief" company but actually they are nothing more than a debt collection agency!! Any thoughts would be appreciated!!
Bills.com
December 09, 2013
Deanna, did your bankruptcy include the second-mortgage debt on which you defaulted? If so, then you should be able to protect yourself from any attempts to collect on that debt. Is that why your lawyers think the collector is bluffing?

Given the gravity of what you face and your need for accurate information, I defer to your lawyer. He or she has knowledge of the details involved and is the best source for the options available to you.
Michelle A.
Twp Of Mahwah, NJ  |  June 17, 2013
Could you please answer a question about foreclosure on a 2nd mortgage in NJ? We are current on our first mortgage ($315K) serviced through Select Portfolio (obtained from B of A in 2012), and delinquent on our 2nd mortgage ($77K) (still serviced by B of A), approx 30 mos. We have retained counsel to try to sort this situation out, and have jumped through hoops for the past 2 1/2 years sending B of A tons of correspondence, only to have our paperwork "misplaced", etc. The bottom line is that our financial situation is such that we have no savings, etc., and can barely pay the first mortgage in a timely manner. We want to modify the 2nd mortgage, but have been sent a foreclosure letter (via certified USPS mail), and are not sure if we can be forced out of our home despite being current on mortgage #1. Our attorney has been reaching out to B of A, but they have been non-responsive. What do you make of this situation and does it look bad for us? Please advise.
Bills.com
June 17, 2013
Your situation is not unique — many have traveled the path before you. I should write "paths" because there is no consistent answer to your reasonable question.

Let's start with the easy answer: Yes, it is possible under law for a junior lender to foreclose if the borrower does not repay the loan as agreed. Just because that is the law does not mean the junior lender will foreclose.

Let us say for the sake of argument your home has a current fair market value of $50,000. Let us say your senior loan balance is $60,000, and your junior loan balance is $40,000. You stop paying the junior. The junior has the legal right to foreclose, but there is no financial incentive for it to do so. As soon as it forecloses, the senior will wake up and foreclose to preserve some of its principal. The junior would see nothing by foreclosing. Instead, it would be smarter to negotiate a deal with you where it sees 5 or 10 cents on the dollar, rather than zero through foreclosure.

Does this mean if you're upside down the junior will never foreclose and will always negotiate? No, we can't say that because lenders do not always act in their best interest. Some commentators speculate this is because mortgage servicers earn a larger fee foreclosing than they do negotiating a settlement, but we have not seen hard evidence to support this theory.

You have three paths to discuss with your lawyer:
  • Try to negotiate a settlement with the junior
  • Allow a foreclosure
  • Talk to a bankruptcy lawyer about a chapter 13

You don't have a good option here. Your challenge is to find the least-bad option.

Johnna C.
Moore, OK  |  May 17, 2013
Can you tell me what the laws are for Oklahoma regarding a 2nd mortgage foreclosure or if that is allowed in Oklahoma? My first mortgage is current but we just cannot afford the second mortgage payment. We were just got dismissed from a Chapter 13 in January for non-payment but we did manage to get our first mortgage current and definitely want to keep our home! What can we do???
Bills.com
May 23, 2013
I can find no Oklahoma laws contrary to the common law regarding junior mortgages. Under common law, any home loan lender can foreclose when the borrower becomes delinquent on their payments. However, whether it makes economic sense for a junior lender to foreclose must be determined on a case-by-case basis, given the collapse in home prices and slow recovery.

Consult with a Oklahoma lawyer who has real property or consumer law experience to learn your rights and liabilities under your state's laws.

You asked what you can do. Open a negotiation with the servicer of the junior lender to learn in you can reach a settlement to resolve the debt.
Connie A.
Antioch, CA  |  February 25, 2013
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.
Bills.com
March 01, 2013
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.
Raquel B.
Sacramento, CA  |  January 09, 2013
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.
Bills.com
January 10, 2013
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.
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Raquel B.
Sacramento, CA  |  January 10, 2013
So, would the clock start clicking from my foreclosure date or charge-off date to buy another home?
Bills.com
January 10, 2013
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.
Javier R.
Upland, CA  |  October 16, 2012
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!
Bills.com
October 17, 2012
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.
Stacey M.
Whitmire, SC  |  September 21, 2012
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 ...
Bills.com
September 21, 2012
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.
Bobby S.
Apopka, FL  |  September 10, 2012
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!
Bills.com
September 11, 2012
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.
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Bobby S.
September 20, 2012
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!
Bills.com
September 20, 2012
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.
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