- Your second mortgage holder can foreclose on your home for non-payment.
- Your second mortgage holder may choose not to foreclose for economic reasons.
- Consider the possible tax implications for any debt you have forgiven.
It is possible legally, although not practical economically, for a second mortgagee to foreclose.
If you have a second mortgage which you are not able to pay, you can face foreclosure, whether or not you are paying your first mortgage in full and on time. While your second mortgage holder is in a weaker position, when it comes to collecting from the proceeds of a foreclosure sale, it does not mean that your second mortgage lender will accept non-payment without taking action. Just as with your first mortgage, you need to be concerned with the issues of recourse and non-recourse loans and a deficiency balance, when it comes to considering what kind of obligations you may have after a foreclosure.
The likelihood that your second mortgage holder will initiate a foreclosure depends on your property values and your lender’s ability to collect on a deficiency balance.
Given today’s real estate market, where property values have dropped significantly in many areas, many homeowners are upside-down on their mortgages. If you are in a negative equity position, it may be possible legally, although not practical economically, for your second mortgage holder to foreclose and preserve its interests in the property. The first mortgage holder receives any money from a foreclosure before the second mortgage holder. If there is not enough equity in the home to pay off the first mortgage, the second mortgage holder gets nothing in the foreclosure sale.
When a second mortgage holder initiates the foreclosure process, it is responsible for paying off the first mortgage holder’s balance due. If the sale price of the property would not be enough to pay off the first mortgage balance and any property taxes, then the second mortgage holder would gain no economic benefit from foreclosing.
Deficiency Balance Collectibility
The ability of the second mortgage holder to collect on a deficiency balance depends on the legal remedies available and your financial position. In some states, such as California, and in some circumstances, your second mortgage may be a non-recourse loan. A non-recourse loan means that the lender has no legal ability to collect any deficiency balance that remains after your property is sold. Its only recourse is the security on the property itself. Most second loans are recourse loans, even in non-recourse states, although it may be a non-recourse loan if you took out the second mortgage and used the funds to purchase your home. If your loan is a non-recourse loan, the second mortgage holder will have no ability to collect on deficiency balance, which reduces the likelihood of the second mortgage holder foreclosing. 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 if your second mortgage is a recourse or non-recourse loan.
Your financial position is also important. As we discussed, a second mortgage holder is often reluctant to pursue foreclosure. However, if you have valuable assets or wages that can be garnished, your second mortgage holder will be likelier to aggressively pursue you, if it has the legal ability to do so. The more collectible the deficiency balance is, the greater the chance that your second mortgage holder will foreclose on you.
Possible Payment Solutions
Second mortgage holders often initially take a hard-line stance in negotiations with homeowners in default. You may find it best to liquidate an asset voluntarily, as opposed to facing a wage levy that could cause you great financial havoc.
However, if the lender is convinced that you have no ability to repay the second mortgage and are considering bankruptcy, the lender’s position will soften and consider a lump-sum settlement. Some second mortgagees will settle for 10 to 30 cents on the dollar, depending on the policies of the company.
If collection efforts ensue, negotiate with the creditor in an attempt to reach an out-of-court settlement on the debt. If necessary, enroll the debt in a debt negotiation program. You can to the Bills.com debt relief savings center for a no-cost quote. Another option is to negotiate the debt yourself.
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.
If you end up with a deficiency balance, make sure that you understand what kind of financial and tax responsibilities can follow you, even after you lose or sell your home. If your lender decides to write off the debt, that can create a tax debt for you. Speak with an attorney or a tax specialist, so an expert can explain things to you. The last thing you want is for a problem that you thought was behind you to rear its head with IRS collection notices or a wage levy from a judgment your creditor obtained.