Second Loans Can Foreclose–But Do They?
When loans and borrowing on your home equity were easy to come by, a lot of people took advantage of the opportunity to cash out on their own home. As a result, many people have first and second loans. When the foreclosure crisis hit, many ended up getting foreclosed on by first and second loans.
Second Loans Can Foreclose
Many people are under the mistaken impression that a second loan cannot foreclose if there is non-payment or some other default by the borrower. This is false. Second loans can foreclose. The question is whether they want to.
The first thing to understand is that liens (anything that you owe on the house that can be foreclosed on if you don’t pay) have an order or a priority to them. Usually, the first company to record a lien, is first in line. So your first mortgage would be first, and your second mortgage, which you may have taken out months or years later, is second.
As a general rule, liens that are lower (that is, taken out later), cannot foreclose on the interest of a lien that was taken out before it (there are some exceptions to this rule—for example, IRS tax liens or county tax liens will jump ahead of almost every lien, regardless of which was incurred first). Practically, that means that a second lienor cannot foreclose on a first lienor.
Will the Second Loan Foreclose?
Let’s look at this from the viewpoint of a second lienor/loan company. Assume you have a home that has a value of $300,000. You have a first mortgage of $220,000, and a second mortgage of $80,000. If the second mortgage forecloses and gets a foreclosure judgment, and the house sells at its valued price, the first mortgage would get back its $220,000, and the second would get back its $80,000.
In this scenario, there is no reason why a second lienor would not foreclose.
But now let’s assume the first mortgage is owed $300,000 and the second is owed $80,000—a common scenario during the foreclosure crisis, when home values plummeted and homes were “upside down” in value.
If the second mortgage forecloses in this case, and the home is still worth $300,000, the first mortgage would get back its $300,000. However, there would be nothing left for the second mortgage. The second mortgage went through the time, effort, and expense of foreclosing on property, just to do the first mortgage company the “favor” of paying them back.
In this situation, the second mortgage company would still have a money judgment (technically, a deficiency judgment) against the homeowner. However, that leaves the company chasing a homeowner for $80,000, an amount they probably can’t collect, and which can be discharged in a bankruptcy by the homeowner.
Are you in foreclosure? Contact Jacobs Legal to speak with one of our Miami consumer rights attorneys today.