It's common for property owners - both residential and commercial - to have more than one mortgage on their property. Maybe you have a home equity loan or took out a "second" mortgage to pay for home repairs or college tuition.
Once a foreclosure action is started, it's sometimes easy to focus on the main mortgage and forget about the others. Rest assured, the lenders don't forget. They all have a stake in the outcome of the foreclosure.
Second or Junior Mortgages: Lining Up for Payment
A first mortgage is often used to buy the property. What's commonly called a "mortgage" is more than one document. First, you sign a note for the loan (it's your promise to repay what you borrow). Then you sign the mortgage, and this document makes your property loan collateral. The mortgage gives the lender a security interest, allowing it to sell your property to pay your loan if you don't make your payments.
Additional mortgages, called second or junior mortgages, include familiar loan products such as home equity lines of credit. Borrowers often take out second/junior mortgages to access equity in the property to pay for home repairs, credit card debts or their child's college tuition, just to name a few things.
They All Want a Share
As a general rule, both first and second/junior lenders are part of a foreclosure action. But, the mortgages aren't treated equally in a foreclosure. There's a priority in the right to payment from the proceeds of a foreclosure sale - an order to who gets paid first.
After the foreclosure sale, the first mortgage is paid first, along with certain other liens and claims against the property. So, there may be a deficiency - not enough money from the sale to pay what's owed on a second/junior mortgage or to other creditors. Quite often, second/junior lenders recover little, if anything at all, in a foreclosure.
Repayment to a second/junior mortgage holder may be affected by a number of things, such as:
- Repayments made to the first mortgage holder
- Other priority liens, such as tax liens
- Foreclosure fees and charges made by the priority lenders
- The loan and recording dates of other secondary loans, which impacts who is paid first
- Whether the loan was properly recorded or "perfected." If a loan wasn't properly recorded, it may lose the priority or "place in line" it would have enjoyed if documents had been recorded correctly in public records
You Still Owe
Generally, a second mortgage is canceled or extinguished in foreclosure proceedings. You still owe the money you promised to pay in your loan document, but the junior lender can no longer look to your property as a source of payment. Once the mortgage is canceled, the junior lender has to pursue other options to get the loan paid.
Options for Lenders To Get Paid
A second/junior mortgage holder has many options for getting what you owe on the loan, or at least some of it. For example, it may:
- Get a deficiency judgment against the borrower - a court judgment holding the borrower liable for the amount owed on the second/junior loan after the foreclosure sale proceeds have been used up
- Buy the property at the foreclosure sale
- Pay off the first mortgage before the foreclosure sale, giving the second/junior mortgage priority when the property is later sold at foreclosure
- Challenge the priority of other loans and liens in court. This usually isn't very successful, though, as most lenders carefully follow the steps needed to protect their place in line for payment
- Of course, a junior lender can start the foreclosure action itself, but loans and liens with higher priority are still paid first
Like anybody else, banks and lenders don't like to lose money; they want their loans repaid. Borrowers with second mortgages and facing foreclosure shouldn't be surprised when the junior lender makes every possible effort to get paid.
Questions for Your Attorney
- I'm having trouble paying my first and second mortgages, but I could come up with enough to pay off my second mortgage. Should I?
- What happens to the first mortgage if a junior lender forecloses and sells the house at auction?
- Will I have to pay a deficiency judgment if I file bankruptcy?