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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