Home Sale Relief

It is quite common for many of you to have a first and a second mortgage on your house. If this is your situation, and you are in foreclosure, you will want to read this carefully.

I see a lot of first mortgages going through a foreclosure process. The second mortgage holder does not foreclose.

If the first mortgage goes to a trustee sale process, title to your house will be transferred via a trustee’s deed or sherriff’s deed to the first mortgage lender in most cases. If there is some equity, there may be a bidder who will out bid the amount you owe on the first mortgage. And they will get the house. But usually, today, there is little equity so the first mortgage lender gets the house back.

But what happens to the second mortgage?

They are wiped out. When a first mortgage is foreclosed, all second and third mortgages are extinguished. The lender who gets the house back gets it with a clear title, other than unpaid property taxes and the like.

But, does that mean you will never hear from your second mortgage lender again? What about their loss? They lost the entire amount of the loan they made, plus interest and fees and costs.

In real estate law, the lender has an option to either pursue judicial foreclosure, or pursue a private foreclosure sale in some states. Other states only allow judicial foreclosure. If you have a deed of trust, you have a loan that can be foreclosed privately. If you have a mortgage, and not a deed of trust, then your loan must be foreclosed judicially.

However, all states that have private foreclosure sales also allow judicial foreclosure. And if the lender of the second mortgage wants to, they can decide to do nothing, get wiped out at the foreclosure sale, and then go after you  for their loss.

Even though they have a secured loan, they still have a note that you signed. So they can under some theories pursue you for their financial loss.

They can, under some theories, get a judgment against you and then garnish your wages, attach your property and require you to go to a judgment debtor exam where you have to answer all their questions about where your assets are and your bank accounts and so forth.

You can get this debt handled by bankruptcy if it comes to that. But some people can’t file bankruptcy and others will end up in a chapter 13 which requires them to partially repay this loan along with others, often over four years.

The upshot is that if you have a junior loan and are in a foreclosure situation, you are not necessarily out of the woods with respect to the second mortgage even if they are wiped out at the foreclosure sale.

I am sorry to report this. But if you know differently, let me know. I don’t know of any second mortgage companies that are going after people but they could do so after the fact. There is a statute of limitations on this that varies state to state. Check with a lawyer if you are in this situation.