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Second Mortgage Default

I am current on my first mortgage but not on my second. Will they foreclose? They are offering to settle.

My second mortgage company did a charge off, but I'm current on my first. How can you assist me to stop foreclosure? I owe $105,000 on my second. My first owes $219,000. What can I do? The second only wants short sale or settle the amount to $70,000 which I cannot do.

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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.

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.

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.

Charge Off

There seems to be a great deal of misinformation or misunderstanding about the terms charge off and write off. The terms are synonyms. As a practical matter, charge off means almost nothing to consumers. When the number of days since the most recent payment reaches 120-180 days, the account is no longer considered current and the creditor is required by generally accepted accounting principles to "write-off" the debt. Writing-off a debt does not mean the debtor is no longer responsible for the debt, or that collection efforts cease.

The Deal Offered

The junior mortgagee is offering to settle the debt for roughly 65 cents on the dollar. Counter-offer the junior mortgagee with 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.

Best,

Bill

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1 Comments

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  • WR
    Oct, 2012
    W
    Corte Madera, CA
    I have read a lot of posts that are in favor of homeowners with regards to second mortgages. They state that homeowners can negotiate to pay cents on the dollar or just not pay their second mortgage since chances are slim that the lender will actually seek foreclosure. As an individual who invested private funds that were earmarked for my children's education into a second mortgage and only to have the homeowner stop paying shortly thereafter and then declare bankruptcy, I am appalled that it is acceptable for a homeowner to basically steal this money from me and not anticipate that I would want it back or want her house in exchange for it. I am not a large financial institution. I am a woman with a family that was relying on that money for our future...not to support a greedy woman I've never met before. Call it a very expensive lesson on my part, but I hope you look at the other side of this argument.
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