Can a Second Mortgage Holder Foreclose in North Carolina?
A second mortgage holder is entitled to foreclose in North Carolina, but it may not be practical to do so. The first, or “senior” mortgage holder has initial rights to the property, and it depends on the amount of the first mortgage and the market value of the property whether any funds will remain after the first mortgage holder’s debt is paid. For the second mortgage holder to foreclose, his must sell the property and pay the debt to the holder of the first mortgage before claiming his own settlement.
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First Rights
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An example of a foreclosure scenario is a property in North Carolina with a current market value of $250,000. The property may have been worth $350,000 in 2008, and the homeowner may have a first mortgage of $225,000 and a second mortgage of $40,000. The total amount outstanding is $265,000, which is less than the current value. In this case, the first mortgage holder will exercise her right to the property and sell it to recover her loan plus costs. The remaining balance will be less than the value of the second mortgage and it may not be worthwhile for the second mortgage holder to foreclose.
Other Options
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If the property is valued for sale at a high enough price, the risk exists that the second mortgage holder will proceed with the foreclosure. Alternatively, if the second mortgage holder is a large lender that is able to carry the debt, it may determine that the property has future market value and decide to foreclose, pay off the first mortgage and hold the property for sale later. If so, the lender can rent out the property to cover the mortgage payments until the lender can sell the for a high enough price to recoup the outstanding debt.
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Deficiency Judgments
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If a foreclosed property sells for less than the total outstanding loans, the senior mortgage holder receives payment first, regardless of which mortgage holder initiates the foreclosure. Any shortfall on the second mortgage remains a debt to the second mortgage holder. Under the deficiency judgment regulations laid out in the state’s general statutes, the mortgage holder is entitled to try to recover the debt by other means, such as wage garnishment or the repossession of personal property.
Defense
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Under North Carolina law, a borrower with a deficiency judgment has the right to try to prove that the fair market value of the property is higher than the amount for which the home sold. If successful, he can use this as a defense against the debt owing to the second mortgage holder. This is another reason why a second mortgage holder in North Carolina may decide not to foreclose, and may prefer an insurance claim for the loss of the mortgage amount.
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References
- Mortgage News Daily Q&A; Can a Second Mortgage Lender Foreclosure Your Home?; Juan Boldizsar; June 25, 2008
- Mortgage-Investments.com: Foreclosure law and Second Mortgages
- “CNNMoney.com”; You Lost Your House - But You Still Have to Pay; Les Christie, February 3, 2010
- Foreclosure Law Firms: When Deficiency Judgments are Allowed in North Carolina
Resources
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