What happens to your Second Mortgage in foreclosure is a rarely discussed topic but an important one nonetheless, especially for your post-foreclosure plans. Although many homeowners have second mortgages, which include lines of credit and home equity loans, very few understand the important distinction between the first and second mortgage.
By just looking at the actual documents there is very little difference between the first and second mortgage. Each consists of a “promissory note”, which includes the actual terms of the loan, and a “security agreement” which is called a mortgage or deed of trust and protects the bank by allowing them to sell your property to recover its losses. Learn More About the Difference Between A Promissory Note and Mortgage.
The primary difference between the first and second mortgage is the priority of who gets paid first. Assuming that your primary mortgage was properly recorded by the bank, that loan will always be paid first and in full before the second mortgage can collect a dime.
Since the second mortgage actually uses your property to secure repayment just like your first mortgage, if your primary lender doesn’t get paid in full the second lender loses the right to collect on the property. Although the loan doesn’t go away, the second mortgage loses its “secured” status and becomes “unsecured” and much less likely to be repaid. See How SaveTheCave Can Help You Stop Foreclosure and Avoid Foreclosure Sales.
What to do About Your Second Mortgage
Ignore is too of a strong word, but for now your focus should be squarely on your primary loan as it controls if and when a foreclosure lawsuit is filed. Since many homeowners have underwater mortgages, the likelihood of the second mortgage getting paid through a short sale or foreclosure is nearly nonexistent. Therefore what happens to your second mortgage in foreclosure is of secondary concern for now.
Once the property is sold, the second mortgage literally disappears unless your home sells for more than the first mortgage. Although the mortgage goes away, the promissory note remains in place.
Banks can then try to collect on promissory notes without the benefit of a mortgage, but most such efforts would be futile when people can’t even pay their first mortgages. Futile, but not impossible because when there’s money around greedy players can’t be far behind.
What will likely happen once the foreclosure crisis settles down is that banks and collection companies will try collecting unsecured second mortgages and deficiency judgments remaining after foreclosure. While many of these claims could be settled for pennies on the dollar, if collection efforts become too aggressive it may be time to meet with an experienced bankruptcy attorney in your area to help reduce or eliminate the remaining unsecured debts.
However, one step at a time as the future will take care of itself so deal with the present and the issues directly in front of you which is developing your foreclosure plans to avoid foreclosure by dealing with your primary mortgage.