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.
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.
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
Columbus, OH | May 06, 2012
May 07, 2012
A deed of trust or what we call a mortgage consists of two documents. The note is the personal promise the borrower makes to lender to repay the loan. The mortgage is the claim the lender files with the county recorder to the borrower's property. The mortgage gives the lender the right to foreclose. The note gives the lender the right to pursue the borrower personally if the borrower defaults.
A chapter 7 bankruptcy strips liability for the note, but does not change the mortgage. A chapter 13 bankruptcy can strip liability for both the mortgage and the note on a junior loan. A reaffirmation of a debt discharged in bankruptcy reestablishes the personal liability for the debt.
If you stop making the monthly payments on the second, also called a junior, this lender still has the right to foreclose. If the property is worth the same or less than the balance of the senior, the junior may be convinced it would make more sense to negotiate a lump-sum settlement instead of going to the expense of foreclosing, which will likely result in recovering nothing.
A handful of progressive states require a home loan lender to negotiate with the borrower before foreclosing. Thank your lucky stars if you reside in one of them, which leads me to my conclusion. Consult with a lawyer in your state who has experience litigating mortgage issues and foreclosures. He or she will explain your state's anti-deficiency laws, which may give you another bargaining chip. He or she will also discuss a negotiating strategy to settle the junior, and discuss the risks of a foreclosure in your circumstances.
Chesterfield, VA | March 29, 2012
March 30, 2012
- $430,000 market value
- $515,000 senior (implied from your message)
- $125,000 junior
- $230,000 negative equity or 148% LTV
As you pointed out, it does not make financial sense for the junior to foreclose because the senior will almost certainly foreclose to be first in line for the foreclosure auction. If that happens, the junior would net nothing because the balance of the first is about $100,000 greater than your market value.
I cannot predict how the servicer for the junior will behave. Your negotiator states the junior's legal rights accurately. However, a foreclosure does not make sense financially. My advice? Consult with a lawyer who has bankruptcy experience. I am not suggesting your only course of action is to file bankruptcy. However, should the junior pull the trigger on a foreclosure, a chapter 13 may be a viable strategy on your part.
February 25, 2012
February 26, 2012
I recommend you speak with a lawyer to discuss the remedies available to you.
San Mateo, CA | February 03, 2012
February 04, 2012
January 15, 2012
- Full settlement at a reduced balance
- Repayment plans: Principal and Interest
- Repayment plan on negotiated full settlements
- Interest Rate Reduction
They did NOT offer me ANY rate reductions offer when we first (originally) spoke that one time. In fact, the man was very affirmative after I spoke of my first mortgage being in the MHA program, that they DO NOT do such rate reductions, etc. It's either 'get caught up on payments' or 'make an offer' to settle the balance. I do not wish to call them and get swindled into an argument due to them telling me the same thing once they get me on the phone. This has been very upsetting and nerve wracking to me. So, I went and spoke the Manager at my local BOA branch who she herself made a few phone calls to the Foreclosure dept at BOA and even called Compass Resolution Services in which they did not even want to tell her much either. After speaking with the Forc Dept at BOA, they advised me that my 2nd mortgage is 'charged-off' with them and this Compass company is a debt collector. The BOA manager asked if they could advise me as to the collection company being able to foreclose on me, they didn't know if they could and advised me to speak with an attorney to see how far they could go, if any. Do you have any legal advice for me as to Compass being a debt collector and not a bank, if they are able to foreclose on my property? I found out this company is based out of California, not that that makes any difference I'm sure.
January 18, 2012
Consult with a bankruptcy attorney. If you qualify for a Chapter 7 or the attorney tells you that even a Chapter 13 could remove your obligation to repay the second, then call the collection agency back and make a very low offer to settle in full. Explain that you will discharge the entire debt via a bankruptcy (again, if you qualify to do so) and they will get zip, zero, nada, unless they accept your offer.
Woolwich Twp, NJ | January 06, 2012
January 12, 2012
I ask these questions because if you are upside-down, and the junior would get zero if there was a foreclosure today, then the lien for the junior may be stripped upon completion of a chapter 13, assuming the market value does not rise anytime soon. Talk to your bankruptcy lawyer about lien stripping and if it applies to you.
It does not surprise me that the mortgage servicers are reluctant to negotiate with, given that you are in the midst of a chapter 13. Ask your bankruptcy lawyer to get involved in the negotiations.
San Jose, CA | December 09, 2011
December 10, 2011
It is possible to negotiate with the lender, however you may find it very difficult to raise the type of capital the lender would demand, seeing that your home has at least $50K in value, after the first mortgage is paid.
You could look into refinancing your first home through the HARP Program. However, since your are a California resident, you will need to consider the possibility that your first mortgage may be a non-recourse loan, and by refinancing, you may endanger that status.
Santa Clarita, CA | January 05, 2012
January 05, 2012
Midway, UT | November 28, 2011
November 29, 2011
Bourbonnais, IL | November 15, 2011
November 15, 2011
Try to work out a payment plan or settlement with the second mortgage holder. Consult with an attorney if you feel you have no means to pay a settlement or payment plan. Speak with a bankruptcy attorney, too, about how filing bankruptcy may be able to help you stay in your home.
Bourbonnais, IL | November 15, 2011
November 15, 2011
Escondido, CA | February 23, 2012
Londonderry, NH | November 12, 2011
November 14, 2011
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