A mortgage company, whether it holds first mortgages or seconds, is sometimes forced to "extinguish" loans it has on its books. The process of extinguishing mortgage loans is rather straightforward, and largely centers on filing lien waivers for loans that companies know they will not recover. Such circumstances include foreclosure and homeowners who qualify for relief.
When a lender decides it will not recover money attached to a mortgage, it will file a lien waiver. A lien waiver is a document that clears a home's title of an entity's interest in the property. When a lien waiver is filed to extinguish a home loan, a lender commonly writes off the debt as a loss. Losses are sometimes recovered by mortgage insurance (PMI) or foreclosure sale. A lender may also attempt to collect money owed on an extinguished loan through debt-collection procedures.
When a lender forecloses on a property, documents are filed and the home is legally transferred to the lien-holder in first position — this is usually a bank holding the first mortgage. When this occurs, the first mortgage is extinguished, meaning it will not be paid back by the borrower, and the home is sold to recover the remaining balance. If there are enough funds, other liens, including second mortgages, may be satisfied. If there are not, junior mortgages are also extinguished.
When the borrower of a second mortgage stops making payments, a lender may be forced to extinguish the loan. This involves filing lien waivers and writing the debt off as a loss. This often happens when an expensive second mortgage results in borrowers unable to afford their housing obligations. As of 2011, the U.S. government offers a program to prevent such hardships.
Federal Relief Programs
In 2009, President Barack Obama modified the Making Home Affordable program to include second mortgages. Under terms of the program, borrowers of second mortgages obtained before Jan. 1, 2009, are eligible for assistance, including having their loans extinguished. Lenders are offered federal subsidies between 3 and 12 percent of unpaid loan balances to extinguish distressed loans.