It comes up often, "can the second mortgage holder foreclose?"
Yes - but it's not so simple. In order for a subordinate lien holder such as a second or third mortgage to foreclose they must first satisfy the superior encumbrances. In plain English if I loaned a home owner $150,000 against their $250,000 home and someone else comes along and loans them the other $100,000 they did not buy the first rights to the home. I have those. If the borrower is not satisfying their loan then don't really have much choice but to file a judgment and take the borrowers income and assets - if the judge will so grant - or to satisfy my loan then take possession of the property.
The inverse is a bit frightening to the subordinate lien holders because of the way foreclosure sales work. The first lien holder (first mortgage usually) has complete foreclosure rights and does not need to satisfy any additional liens to foreclose. In fact when the property is sold at auction the first lien is satisfied in whole before any additional funds are distributed. If we use the example from above and I foreclose but the sale only brings in $150,000 - I keep it all except the fees associated with the foreclosure and sale. The subordinates get nothing.
So how do the subordinates seek relief? The borrower still owes the money. If the sale happens and the subordinates receive no relief they file for a judgment against the former borrower now become defendant. Chances are the judge will award the judgment to the plaintiff who is free to collect according to the laws of the area wherein resides the defendant.
Friends don't let borrowers become defendants.
(I am not an attorney, I just keep their kids in BMW's and Lexuseses.)
Ken Cook - Georgia - FHA, USDA, VA and Conventional Home Loans (678) 439-8683
8 Comments on Subordinate Lien Foreclosures - Quick Clarification
MAY
21
2008
Lol @ your last sentence Ken. Solid info, this will also help folks understand why 2nd liens of any kind (HELOC's, Home Equity Loans, etc) are a much riskier loan to make.
Jason - why is the rate on my second 8% but 5.5% on my first? ;)
Michelle - the second mortgage has to pay off the first mortgage before the second mortgage can foreclose (unless the first and second mortgage is from the same lender). If the first mortgage forecloses the second mortgage is on their own if the property doesn't sell for enough at the auction to completely pay off the first mortgage - then what is left over goes to the second. If there is anything left over after all the mortgages have been paid it comes to me. :) - not really
Ken- and here in Florida it is very difficult for the second or the third to get their judgment paid. They can not attach to homestead property. Most of these just don't get paid and the borrower's credit is just ruined or they file bankruptcy.
Actually my first, only and last short sale is going through this right now. The second left the table and they are threatening to foreclose. I thought this is the way it was so it disturbs me that they left the table. Why would they do this if they really don't have much to gain to begin with?
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Lol @ your last sentence Ken. Solid info, this will also help folks understand why 2nd liens of any kind (HELOC's, Home Equity Loans, etc) are a much riskier loan to make.