If owning your own home is the great American dream, then losing it to foreclosure is the great American nightmare. Though foreclosures were down in March 2013 from a year earlier, there were 152,000 filings that month -- or one in every 859 homes in the United States. For many owners of homes in foreclosure, a major concern is how to deal with second mortgages.
Understanding a Second Mortgage
A second mortgage is a home loan on a property that is already mortgaged. The loan is secured by the homeowner’s equity in the property -- the difference between the property’s market value and the first mortgage’s value. Second mortgages run concurrent with the first mortgages, have a shorter life span, and if there is a foreclosure -- do not get paid until after the first mortgage is paid off.
The Foreclosure Process
Foreclosure is the legal process in which a lender gets a court order to cancel or foreclose a borrower’s legal right to redemption. The home loan is canceled, but the debtor has an opportunity to redeem the property by paying off the balance of the loan and the foreclosure costs in their entirety. If the debtor cannot come up with the money, the lender is free to expel the borrower from the home and sell it to a new buyer. The debtor remains legally responsible for the delinquent payments and fees if the house remains unsold or if the proceeds are insufficient to cover the debt.
Second Mortgages in Foreclosure
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When you buy a home you sign a promissory note, a promise to repay the loan. A mortgage is a security interest in your home that allows the lender to foreclose on your home if you fail to keep up with the monthly payments. The second mortgage is essentially a lien -- giving the lender the right to seize your property (the collateral) if you default on payments. When a home goes into foreclosure, first liens get priority over second liens. Hence a first mortgage, used to purchase the home is paid before the second mortgage is paid. If there are no funds left for the second mortgage after the first mortgage is paid, the lien is eliminated but not the debt. The lender of the second mortgage no longer has a right to your former property after it has been re-sold, but you still owe that lender the balance of the loan.
Possible Actions by Second Mortgage Lenders
When lenders lose money as the result of foreclosure, they usually take actions to try to minimize loss. They may file suit against the borrower -- unless prohibited by state law -- to try to recoup their losses. They may seek to put a lien on other real estate you own, attempt to freeze your bank account, or try to garnish your wages. Sometimes, lenders charge off the delinquent debt when the first mortgage and part of the second mortgage are paid. A charge-off is a financial process that brands the debt as uncollectible, but it does not eliminate the debtor’s legal obligation to pay. Though it may seem harmless, a charge-off is bad for your credit score, and in some states charged off debt can be considered taxable income.
Charles Infosino is an authority on regional entertainment and author of "The Unofficial Guidebook to Paramount's Kings Island." Infosino earned his Bachelor of Arts in international relations from SUNY New Paltz and his Master of Business Administration from Northern Kentucky University. He is a bankruptcy specialist III for one of the largest banks in the world.