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Foreclose on Second Deed of Trust

Mark Cappel
UpdatedJun 4, 2010

Can the holder of the junior deed of trust foreclose if the senior is current. What are the chances of that happening?

I live in California. My 1st is with Citi and has a balance of $64K and I have a 2nd with B of A with a balance of $240K. I know that is so strange. My house is currently valued at approx $215K. Due to job changes and layoffs, we are unable to meet our monthly obligations. I have quit paying credit cards and we down to eating beans and weenies just to keep the mortgages current. Citimortgage appears to be working on a modification but B of A has turned me down because I am not 60 days behind in my payment. I guess I will not pay my 2nd mortgage for 60 days and try to pay some credit cards. With your experience, do you think B of A would foreclose or on me or try to negotiate with me? What would motivate them to buy my first and foreclose when they are already upside down on the 2nd?

Obviously, I cannot speak for Bank of America nor can I predict what actions it will take. Let us assume for a moment that Bank of America, the junior of the deed of trust, will take actions that are in the best interest of the investors who actually put up the money that wound up in your junior deed of trust.

You mentioned the present fair market value of the property is $215,000. You did not mention if the first deed of trust was ever refinanced. This is significant, as we will see later. The senior deed of trust balance is $64,000 and the junior is $240,000. If you default on your payments to the junior deed of trustee it has four options. First, it can do nothing and sit on its rights. Second, if can initiate a non-judicial foreclosure. Third, it can file for a judicial foreclosure, although this rare in California. Fourth, it can buy-out the senior deed of trust.

If Bank of America selects option No. 2 or No. 3, it is almost certain that the senior deed of trustee will also foreclose. At this point, the two will negotiate how big of a piece each will get of the $215,000 pie. It is almost certain that Bank of America's piece will be $150,000 or less depending on how the two negotiate the costs of their foreclosures. If Bank of America chooses option No. 4 and chooses to foreclose, it has eliminated the cost of one foreclosure, and gives Bank of America much more leverage in its negotiations with you, the consumer because you cannot play the junior and senior off of each other when negotiating terms.

If the senior deed of trust was a purchase-money loan and was never refinanced, this is considered a non-recourse loan. This means that neither Citibank nor Bank of America can collect a deficiency balance from you if you default on the senior. This characteristic does not change if Citi sells the loan to Bank of America or anyone. Therefore, this is a crucial point. If the loan was refinanced, Bank of America may be attracted to buying the loan to reduce its costs an increase its chances of recovering a larger amount from you. On the other hand, it has no incentive to buy the loan if it is the original purchase money loan.

I realize I did not answer your question. However, the answer to your question is not knowable outside of the second mortgage negotiation department at Bank of America.

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