If you become delinquent on your second mortgage, the lender can foreclose on your house and property.
The Foreclosure Process
The foreclosure process varies from state to state, but usually takes from two to 18 months. Generally speaking, if mortgage payments are not received within 150 days, the bank can proceed with the foreclosure process.
If the second mortgage holder forecloses, it is not automatic that the first mortgage holder will foreclose, but to protect their rights it would be foolish for the first mortgage holder not to foreclose as well. Alternatively, the first and second mortgage holder will negotiate a deal amongst themselves where one buys the interest in the property from the other so that only one mortgage holder will foreclose.
The house will be sold, the first mortgage holder will be repaid first, followed by the second mortgage holder if any funds remain.
Typically, in these situations, the sale price is less than the value of the mortgages held against it. If that is the case, then in some states the borrower could still owe an unsecured balance, which is called a "deficiency balance." The good news is that a deficiency balance (if it exists and if your lenders pursue it) is an unsecured debt (like credit card debt) that can 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. (I have written about the California recourse loans issue before.) 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.
In the interest of full disclosure, 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 late 2009, 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.
Loan Workout Plan
An agreement between borrower and lender 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 Plan
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.
Conclusion
Foreclosure is a serious situation that has negative repercussions on your credit score. Avoid foreclosure if you can. Consider a a deed in lieu of foreclosure or a short sale if you cannot create a loan workout or forbearance plan with the lenders.
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.
I hope this information helps you Find. Learn & Save.
Best,
Bill
Our home value is $178,000 currently.
We recently went through bankruptcy due to the loss of my job, but stayed up on our payments on the mortgages. Now that we are discharged of our debts and I have regained employment after 11 months we are having trouble paying all three.
The first mortgage is an interest-only 5-year ARM we are trying to get a modification on. (Which is a pain in itself) During the bankruptcy our first and second loan were sold to other lenders but are still considered discharged.
Do you think if we stopped paying on the second and the third lien they would even think about foreclosure when we are so underwater in our value?
This is as far as I will go: If you decide to stop paying the two juniors, save as much as you can in a separate account. If the juniors foreclose, use the funds in the account to negotiate a lump-sum pre-trial settlement.
The juniors could file a notice of default and foreclose. The bankruptcy discharge removed C.H.'s personal liability for the promissory notes built-into or connected to the home loans, but a bankruptcy usually does not strip the lien from the property. Because the loan is still secured by the property, the lender can foreclose and take possession of the property if the homeowner defaults on their payments.
There are circumstances where a chapter 13 bankruptcy will strip the lien from the property. This occurs when the market value of the property is less than or equal to the balance of the senior loan.