can a second mortgage foreclose first mortgage current?

A lot of people have second mortgages and are having great difficulties making their payments. What happens if you are current on your first mortgage? Can the second morrtgage foreclose?

There is a lot of confusion with regard to can a second mortgage foreclose first mortgage current, and I will try to answer some of those questions here.

If you have a first and a second mortgage and you are delinquent, either one may exercise the remedy of foreclosure. This means that if you do not pay on your first mortgage or second mortgage, either may file a notice of default or notice of pending foreclosure. What is filed depends upon your state and whether it is a "mortgage state" or a "deed of trust" state but for our discussion it doesn't matter.

Often when you face foreclosure, you have little or no equity. That is especially true today because the percentage of equity that many homeowners have is at a historic low.

Let's use an example so this doesn't get confusing. Say you have a $100,000 first and a $50,000 second and your home is worth $100,000. Assume you cannot pay either mortgage or you decide not to pay.

The first mortgage holder may elect to file a foreclosure notice. The second mortgage holder now has a choice:

The second mortgage holder can pay your first mortgage delinquent balance including all the late payments and fees. Now you owe all this money to the second mortgage holder. They brought the first mortgage current and now they send you a bill for all this money they advanced on your behalf. If you can't or don't pay, they then can foreclose by filing their own foreclosure notice.

In that case, your first mortgage will be current, because your second mortgage holder made it current. And the second mortgage is foreclosing on you.

But you see, in the example we set out here, there would be no incentive for the second mortgage holder to bring the first current. They may pay $10,000 of fees and late payments to the first mortgage holder. But then they have little or no chance of getting this money back any time soon. Because if they foreclose, nobody will bid on your house. A bid would have to be over market value, which wouldn't happen. So they will have paid $50,000 to you for the original loan, and $10,000 to the first mortgage holder. They would be out $60,000 and have your house back. But wait — your house still has the first mortgage on it of $100,000. So the second mortgage holder is out $60,000 they won't get back.

On the other hand, if the second mortgage holder does nothing, the first mortgage can foreclose. If nobody bids at the sale, the first mortgage holder will get your house back. The second mortage is junior to the first, so it gets wiped out at the foreclosure sale.

Now the second mortgage holder is out the $50,000 they initially lent to you. But that's still better than being out $60,000.

Bottom line is that whether or not the second mortgage holder will foreclose depends upon how much equity you have. Today many second mortgage holders have no equity protecting their loans and would be wiped out in a foreclosure.

That doesn't mean they can't go after you. They can. If a second mortgage holder is wiped out in a foreclosure of the first mortgage, they have not exercised any remedies legally and now they may pursue you in court for a judgment based upon breach of contract. I expect many such lawsuits to be filed.

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6 Comments on can a second mortgage foreclose first mortgage current?

Kerby Denison @ 2:47 pm:

Hi, I was just wondering If I am paying my 1st mortgage payment and staying current and stop paying my 2nd which is a recoarse loan what could happen???

The second isn't going to be able to do much most likely. A lot of folks are doing this. The second has no equity most likely, so they can't really recover much absent foreclosure or short sale and even then…

warmly

–Richard

debby @ 8:44 am:

We are being threatened by a 2nd deed of trust holder that they are going to foreclose our 1st deed of trust is current with wells fargo. We do have lots of equity in our home, but bad credit to refinance. Can and will the second foreclose?

Debby

dc @ 11:54 am:

1st mortgage is current, $245 balance, 2nd is not current $172k balance. Home is appraised at $287k or less. Can 2nd foreclose…and the 2nd is now with Inusured Company for BAC…they have the note…

RC @ 12:40 pm:

What if our 1st & 2nd mortgages are both with the same company (B of A) and I'm behind on both, should I focus on making my 1st mort current and work on my second mort when I am able? I asked my 1st mortgage counselor, who cannot advise on my 2nd mort by the way, what I should focus on, and he leaned towards saying the first, but it was his personal opinion he added. What I am really trying to figure out is what is the banks position on this matter considering they hold both notes?

CL @ 3:51 pm:

same boat rc.same bank.i am trying to find the answer myself.

jen @ 6:40 pm:

I am in the exact same boat with the same lenders! I have no answer some banks and lawswyers say yes they can foreclose but others say do not worry no one wants your house? I am confused!!