- Review how the foreclosure process works.
- Understand the difference between a recourse loan and a non-recourse loan.
- Examine the alternatives to foreclosure.
I am current on my first mortgage but not on my second. Will the second foreclose? What are my options?
I am 67 years old; purchased this condo I live in in 2005. I owe $280,000 on the first mortgage [mortgage is current; thanks to help for re-financing from NACA]; owe $96,000 on second mortgage. I have exhausted my 401(k) to make payments on both mortgages. I have worked over a years with Flagstar Bank to attempt to re-finance the 2nd mortgage -- to no avail. I made 3 forbearance loans, but once that was one, got the same response, "Sorry, we can't help". I received a call from a collection agency this morning, wanting to help -- either lower the amount owed or lower the payment. I want to retire -- get out of here and go away, never looking back at the horrific investment. What can this collection agency do to me? They cannot foreclose, can they? The property assessment from Fairfax County is $252,000. What can I do?
Your question contains several issues that do not lend themselves to brief, easy answers. Allow me to handle your brief issue first.
A tax assessor's value of the property is important for tax reasons, but is generally far lower than the market value of the property. The market value of your property is determined by its location, location, location, plus its amenities such as the number of bedrooms, bathrooms, square footage, size of the garage and lot, and overall condition of the house and grounds.
You can estimate your house value by comparing your property to others in the neighborhood. In the real estate business, this is known as "looking at comps." The term "comp" is short for "comparisons." An experienced real estate broker or agent keeps comps in his or her head in the same way a baseball fan keeps current statistics of his or her team memorized.
For those of us who are not real estate agents there is Zillow.com. Zillow correlates public information about properties in the United States. Zillow uses sales prices, appraisal information, and other data on comparable homes in a given area to estimate the value of a home.
Look at Zillow to determine the estimated house value.
Foreclosure on Second Mortgage
If you are current on your first mortgage and become delinquent on your second mortgage, the second mortgage lender (also called a "junior mortgage" holder) 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 senior or junior 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 junior mortgage would be repaid after the senior mortgage is paid in full.
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.
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 junior 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.
Junior Mortgage Foreclosure
According to Bills.com readers I have spoken to and corresponded with, junior 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 junior mortgage and are considering bankruptcy, the mortgagee's position will soften and consider a lump-sum settlement. Readers report that some junior mortgagees will settle for 10 to 30 cents on the dollar, depending on the policies of the company.
In the interest of full disclosure, it is possible legally, although not practical economically, for 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.
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.
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.
Making a Deal
Make an offer to the junior mortgagee to settle the debt for 10 cents on the dollar and take the negotiations from there. Explain that if there is a foreclosure the junior will get nothing in the sale of the property. Any deficiency judgment they get will be met with a bankruptcy. You have leverage in this negotiation -- use it.
I hope this information helps you Find. Learn & Save.