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
Antioch, CA | February 25, 2013
March 01, 2013
Sacramento, CA | January 09, 2013
January 10, 2013
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.
Sacramento, CA | January 10, 2013
January 10, 2013
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.
Upland, CA | October 16, 2012
October 17, 2012
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.
Whitmire, SC | September 21, 2012
September 21, 2012
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.
Apopka, FL | September 10, 2012
September 11, 2012
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.
September 20, 2012
September 20, 2012
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.
Livonia, MI | August 13, 2012
August 13, 2012
Option 2a: Talk to your bankruptcy lawyer about strategically defaulting on the junior if the chapter 13 idea I just mentioned is not a possibility in your circumstances. This is a risky strategy, but if you explain to the servicer that you are willing to offer a small lump sum as an alternative to a foreclosure, it may accept your settlement offer.
Option 2b: Allow a strategic default, then negotiate with the junior. If negotiations are not fruitful, negotiate a settlement with the collection agent the junior sells your collection account to.
Austin, TX | June 14, 2012
June 21, 2012
I am not answering your question about your foreclosure because I really want you to consult with a lawyer about your defective bankruptcy filing before taking any other action.
Delhi, CA | May 31, 2012
May 31, 2012
Regarding your questions, read the article I just mentioned to learn if Bank of America has the right to collect the deficiency balance. Based on the facts you provided, and assuming you never refinanced, then Bank of America may not pursue you for the deficiency balances of either loan. However, if you refinanced a loan, then you wiped out California's anti-deficiency protection for that loan. I cannot say whether you will find someone at Bank of America who would make such a statement. There is no harm in contacting its legal department to ask.
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.
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