Second Mortgage Foreclosure

Second Mortgage Foreclosure
IN THIS ARTICLE:
  • 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.

Property Values

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.

Quick Tip

Each state legislature created unique foreclosure and anti-deficiency laws. Follow the links just mentioned to learn the foreclosure rules relevant to 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.

Quick Tip

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.

Summary

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.

100 Comments

MMaggie, Mar, 2021

Property shows satisfaction on 1st mortgage . 2 be mortgage for 285k is now in foreclosure for 180k. Is it possible that I can contact the mortgage company and offer to take over the mortgage for ownership? I’m 22 just graduated college. Please help

JJoshua Abreu-Rosa, Aug, 2021

Hello Maggie,


 Typically, foreclosures occur when the homeowner is behind in making payments on the mortgage loan used to purchase the home. Ultimately, this means that the ownership of the home switched from you to the bank.

Maggie, we are sorry that you are dealing with this financial stress. The bank should actively seek ways to resolve the debt and return ownership to you.  After significant time has passed, you may get an eviction notice.
 
 Our affiliates like Freedom Debt Relief can help explore options to resolve your dilemma.  They can be reached at 800-852-1431. They will review your situation and provide some options that may lead to your financial success. 

Regards, Josh


 

 

DDouglas, Dec, 2020

Hello, hope all is well during these crazy times. Im in a reverse situation that I do not quite understand. There are two mortgages on a house I just won at. a forclosure auction in PA, one from 2001 and the2nd from 2002. (Just below this are the facts). But it seems the 2nd mortgage holder is the one foreclosing. Where does that leave me with? So I am in a pickle and hopefully did not just lose 250k. Here are the nuts and bolts in recorded order 1. Decision one bank mortgage 136k 2. MERS assignment nominee to Household financial Corp 3. 2nd mortgage for 188k serviced by household consumer discount company 4. Assigned to LSF9 Trust On the title report there is only a judgment fro the 2nd mortgage and they LSF9 were the ones to foreclose on the property. Which just seems off to me to begin with because how can a 2nd mortgage foreclose if the 1st has dibs on the proceeds. Anyway I looked further into it and the MERS loan of 136k is inactive noted in 2001. The servicer seems to be out of business. The 1st loan of 136k still shows up on the title search unsatis As I just payed for this at forclosure, am Going to have to pay off this extra 136k? 2. If the servicer is out of business, is the loan just gone ? 3. If its gone how do get it off the title? 4. If it is not gone how do I find who is servicing it? I am so worried. The debt on the house and upset bid was 218k I payed 247k which cover the cost of the foreclosing lender, but where is this unsatisfied 136k loan at?

JJoshua Abreu-Rosa, Aug, 2021

Hello Douglas. 

Thank you for reaching out to us. Please, do not take my answer to be legal advice as I am not an attorney. Only attorneys can offer legal advice. 

Generally, when a single home has two mortgages, the first one has a higher interest against the property. The second could be 10-20%. If you own the home due to the auction, then your liability is pretty small. 

I am assumed you hired a title search company to see who might hold liens against the property. What you can do is purchase title insurance to protect yourself against any liability that was not uncovered prior to the auction.

In regards to the servicer, I do not think they have any weight in the matter. Your coverage should make your investment in your favor or at least reduce the financial cost.

Remember, the mortgager is calling the shots, and hiring the Servicer to facilitate the ledger. Find the mortgager and then you can resolve any pending balance. 

This is really interesting I would love to know what ends up happening. Maybe I can provide you with further assistance once you have gathered a few updates. 

Regards, Josh  







FFrank W, Sep, 2020

2nd Mortgage company foreclosed on property that was upside down, and refused to negotiate with a payment plan. 1st Mortgage current. We were evicted from the property after foreclosure on May 2019. Issue: 2nd Mortgage company has not payed off first mortgage and are renting out the property and using my credit to pay the first mortgage. Is this legal? Aren’t they suppose to pay off the first after auction? Are they suppose to assume the loan and get my name off the first mortgage? Any help appreciated,. Home in California.

DDaniel Cohen, Sep, 2020

Frank, you need to speak with a Real Estate attorney. It is my understanding that the second mortgage holder would have to pay off the first mortgage to foreclose on the property. 

DDonovan D, Oct, 2020

I am in the identical situation in California. Did you discover additional information in regards to your situation?

CChristina Simmons, Feb, 2020

I had taken out a second mortgage in 2005. The bank I took it out with went out of business. it appeared that the loan was bought and sold several times. I never paid on the second once the lender went out of business. A company I had never heard from bought the loan and decided for start the foreclosure process. I never received a letter from this company and did not know that my home was in trouble. I received a phone call from a friend who told me my home was foreclosed on. I went to the county recorder and brought up the paperwork. The company had checked a piece of paper that stated they did not need to let me or the first know about the sale of the property because there was no first associated with the property. I was contacted by the sellers lawyer (the first time I had heard from this company) telling me to leave the property. I lost the house in 2015 and the first still has not been paid off by this company. When the first threatens to foreclose on the new owners they pay. I am being hurt by my credit score because the second will not give the first mortgage their due amount. Who do I talk to for help is there any help. Thank you for any input.

DDaniel Cohen, Feb, 2020

I wish I could offer a Time Machine, Christina. I would urge you to seek legal help before the foreclosure went through.  Speaking with a lawyer is still the best choice, but I am not sure if it is too late to do anything to help you.

EElva, Dec, 2019

My second mortgage was forclosed but my first is in good standing. I want to sell my home in a short sale to pay off the first mortgage. And the second to the third party buyer of the second. Is this possible?

DDaniel Cohen, Dec, 2019

I am not a lawyer, so what I share is not to be considered legal advice. 

Not sure how you would accomplish this. Why would a third party buy a seoncd mortgage in this situation? Are you able to get the first mortgage holder to agree to a price that is less than the current value of the property? If so, why wouldn't they take the property in a forelcosure? If not, then there is no equity in the property and buying a second mortgage would be senseless.

Would you please clarify the facts, if i misinterpreted them?