Second Mortgages and Foreclosure Law
A second mortgage is more commonly referred to as a home equity loan or home equity line of credit (HELOC). This is a loan for a creditworthy homeowner that has built up at least 20 percent equity in the current market value of his property. When it comes to foreclosures, the second mortgage factors in the process significantly.
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Liens
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A lien is the filing of an ownership interest in the property by someone other than the owner. When selling a property, all liens must be paid in order for the sale to take place. For example, a mortgage would be considered the first or primary lien, and holds the most interest in a property. A second mortgage is known as a secondary or junior lien. This holds true even in the event of a foreclosure.
Lien Priority
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Since the first mortgage is the primary lien holder, it has payment priority in a foreclosure. In other words, once the property sells, the first party to be paid is the lender who holds the first mortgage. The second lien holder will only be paid should there be profits over and above the settlement to the primary lender. For example, if a borrower owed $100,000 on a first mortgage and $20,000 on a second mortgage, then the house was sold as a foreclosure for $101,000, the first mortgage company would receive $100,000, and the second mortgage holder would receive only $1,000. Many second mortgage holders try to negotiate with the primary lien holder for a payment settlement that allows them to collect a larger portion of the balance due than they would in most foreclosure scenarios. If this is unsuccessful, there are other legal methods they can try.
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Bankruptcy
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If a borrower files a Chapter 7 or Chapter 13 bankruptcy while his home is in the foreclosure process, it will halt the foreclosure proceedings temporarily and can also have a major effect on the second mortgage holder. With a Chapter 7 filing, specifically, the second mortgage is looked at as an unsecured debt, so it can be discharged by the courts and never be paid by the borrower. In this case, the second mortgage holder has no legal recourse. In a Chapter 13 bankruptcy, the chances for the second mortgage to be completely written off are lower, but it's still 50/50. For many Chapter 13 filings, a payment agreement is made between the borrower and the lender to establish a repayment plan over time.
Work Out Programs
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When a homeowner is in danger of a foreclosure, the first mortgage holder is often willing to work with the homeowner to find a workable solution. This is contingent upon the homeowner being able to resume regular monthly payments in the near future. In this case, the second mortgage holder might also consider a work out repayment plan and suspend payments on the loan until the primary loan is brought out of default.
Legal Options for the Second Mortgage Holder
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In the event of non-payment after a foreclosure sale, the second mortgage holder can file a judgment against the borrower for the entire balance due. Using the example above, on a $20,000, of which $1,000 was paid, the lender can file a judgment for $19,000. Having a negative mark, such as a judgment, on a borrower's credit report will not only hinder his ability to apply for new credit lines, but the full amount of the judgment must be paid off when he purchases a new home.
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References
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