As if debt-ridden homeowners in foreclosure didn't already have enough to worry about, they can add second mortgages to the list. While banks are more amenable to working with homeowners on their first mortgages in foreclosure proceedings, that second mortgage — often owned by a different lender — is another story entirely.
There’s no question that second mortgages are attached to many U.S. homes either heading into foreclosure or ones that are already in foreclosure. According to Banker and Tradesman, 46% of 320,000 U.S. homes surveyed are in foreclosures (the homes were purchased between 2003 and 2007). About one-third of the homes had second mortgages attached. Of those residences, 69% were underwater — owing more than their homes were worth.
Big lenders have a huge stake in the market. Banks are usually the primary owners of the more than $1 trillion worth of second mortgages active in the U.S. today, according to the Federal Reserve.
Second mortgages also can negatively impact an increasingly popular way out for underwater homeowners. Since second mortgage lenders are usually different than the lenders of the original mortgage, getting the permission of both mortgage holders — a necessity for a short sale — is more difficult. That’s especially so with second mortgage holders in a short sale — many fear they won’t get paid back on the debt, and prefer foreclosure where they believe there’s a better shot of earning their money back.
For traditional foreclosure situations, the second mortgage usually only gets paid after the first mortgage is paid. And both mortgages are superceded by real estate taxes and IRS tax liens. If there is any cash left over, the second mortgage-holder — sitting there at the bottom of the foreclosure food chain — can then get paid.
Then there’s the issue of why second mortgage holders should want a foreclosure at all. Often, homeowners in foreclosure still pay their monthly second mortgage debt — it’s far less than the payment owed on the first mortgage, and thus is easier for homeowners to pay. And banks that hold second mortgages don’t want that gravy train to stop, which it usually does in a foreclosure process.
But second mortgage holders — even though they’re in the back of the payment line — can still trip up a home foreclosure. Banks holding a second mortgage on a home that the homeowner and first mortgage holder want to bring to enter into foreclosure can slow the process if they feel they’ll be shut out, payment-wise.
If homeowners, first mortgage holders and second mortgage holders can’t come to terms on a foreclosure deal, the foreclosure deal can drag on for weeks and months. While the foreclosure can go through without the agreement of the second mortgage holder, it’s up to the homeowner to satisfy that debt after the foreclosure process ends. That can mean garnishment of wages, a lawsuit or some agreement where the bank holding the second mortgage and the former homeowner come to terms on a payment of 10-15 cents on the dollar.
If they can’t get paid via foreclosure, banks and lenders do have some other options. A second mortgage holder can decide to sue the former owner of the home, even though he or she no longer owns the title to that home. More often, second mortgage owners write the foreclosure off as a bad debt, especially if the debt is only a few thousand dollars.
No matter what the outcome, second mortgages can really gum up the foreclosure works. If you’re in a foreclosure process, or heading there, talk to your original lender and (if you have one) your lawyer on ways to minimize the potential interference from second mortgage holders.
—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.