Can second mortgages foreclosure
Yesterday I did a long interview for the New York Times. I asked a few of you to visit with the reporter and a few of you did. Thank you for that.
The subject was large jumbo type loans, ARM or interest only or option arms on very expensive homes, like upwards of a million dollars.
Many if not most of these folks in this situation have two mortgages. Maybe you do. And even if you "only" owe $200,000 and not one million, you will want to know about liability and whether the second mortgage holder can foreclose. Second mortgages foreclosure is not as common as it was in prior cycles and here is why.
in the "old" days before around 2001, if you wanted to buy a house you had to have a down payment. And if you did not, you had to qualify for FHA or private mortgage insurance and have pretty good credit.
Second mortgages and foreclosure - how it used to work
If you had a second mortgage, the second mortgage holder would make sure they had some collateral. This is known as loan to value ratio, or LTV. Basically, you had to have some equity.
Then if you stopped paying on your first mortgage (or both mortgages), the second mortgage holder would keep your first mortgage current. And the second mortagage holder would bill you for whatever they paid on your first, plus interest and penalties, and they would go after you in foreclosure. They would go to the foreclosure sale if you still didn't pay, and they would often end up with your house back. Still with the first mortgage on it.
If you had a lot of equity, someone would bid at the foreclosure auction. They would bring cash that would pay the second mortgage for everything that they were due including your balance and fees and the amounts they had paid to the first mortgage holder on your behalf. And that buyer would end up with the deed to your house, with the first mortgage still on it.
Now, I speak in the hypothetical because this does not happen so much now. Now, there are so many first mortgages that have no equity, and the second mortgages are long since left without equity, wiped out.
So if you are in a situation with foreclosure with two mortgages, more than likely the second mortgage will not foreclose. They have no reason to. They have no equity to get anyway.
They will leave the foreclosure to your first mortgage.
The first will foreclose and then the second mortgage holder will be able to go after you.
The second mortgage holder can pursue you in civil court under a breach of contract claim.
Even in states like California where first mortgage foreclosures do not lead to personal liability in most cases. Even there, in virtually all states, the second mortgage, once wiped out, can come after you personally. They can get a judgment and garnish wages, go after your cash and vehicles, and force you into potentially a bankruptcy.
And please watch my video on how to avoid foreclosure by doing a short sale even if you have a second mortgage foreclosure situation. The answers are here. I will never share your name or email with anyone.
And watch this video on short sales and foreclosures.