Can a 2nd mortgage foreclose if the 1st is current?

Question

Hi,
Can a 2nd mortgage foreclose if the 1st is current? They are with the same servicer but different investors.

-Thnx.

Scott Hubbard · Answer

It is difficult to say exactly without knowing the terms of the promissory note, other claimants and your state laws.  You also have to take into account whether it makes business sense to foreclose.  There are alot of variables like other claimants and whether those claimants have superior lien rights.

In general, provided the 2nd has the legal right, the means, and it makes business sense, they may very well foreclose.

Since the servicer is the same, it does have the fiduciary responsibility to both parties.  In my opinion, if the 2nd investor wishes to proceed, the 1st will need to be made whole.

If the market value covers the 1st mortgage and there is likely enough equity to cover a large portion of the 2nd, then there could be a chance the second will forelcose.  However, even if there is enough equity to cover the 1st and a portion of the 2nd, it still may not make business sense to foreclose if there are other liens which will need to be paid.

In short, YES they might, but the 2nd will need a very good scenario for them to go through the expense.

Don Konipol · Answer

Any lien holder can foreclose if the deed of trust (mortgage in some states) lists a default action  and an occurance of that default action has occured.  This does not have to be non payment - it can be a lapse in insurance, non payment of taxes, etc.

Jon Holdman · Answer

What are you trying to do here, Tess?  Is it your house and you're wondering if the second will foreclose if you stop paying?  Are you trying to negotiate a short and wondering how little the second will take?  Thinking about buying one of the notes?

For one, tax assessments are useless when it comes to valuing the house.  If you're an investor, and that's what you're using to do your valuations, you need to spend more effort on getting a good valuation.

If $68K is a good value, the second is worthless.  Even the first isn't worth its face value.  So, you would think you might short the first to some reasonable number (though reasonable is well south of $50K) and short the second to zero.  Probably won't happen.  The second would rather see it go to auction.  If there's a $4.7K offer on the table to them, they should take it and run.  Whether they will or not depends on a lot of factors.  And, its money straight out of the first's pocket, so they may not be willing to let the second have that much.

Not many places took the 65% hit in values that's implied here.  Did the owner's wreck the place or something?  Maybe the second (and first) thinks they have grounds for claims on insurance or directly against the owners.

Is this an investment property or a primary residence?  Do the owners have other assets?

Jon Holdman · Answer

If the second does end up with possesion of the property, the first is still a valid claimant.  Or, if its sold at auction, the first is still there. There may be a clause in the promissory note for the first that allows them to foreclose if the second does.

Steve Babiak · Answer

The other posts above explain that even though the second CAN, they might not want to.

Tess Vismale · Answer

Thanks for all  of your responses. The house is tax assessed @ $68k was once $215k. The 1st is $103k & the 2nd is $48k.  The 2nd has a short pay offer on it for $4.7k,

Bill Gulley · Answer

Hi, sounds like you're interested in acquiring a non-performing note with a short payoff!?!?

Let's change some terms here, instead of looking at equity, it's the market value less all senior liens required to be cleared to foreclose. If the market value is high enough to cover the costs of acquisition as well as holding and sales expenses, then the foreclosure may make sense.

Check with state law, as in a foreclosure sale in amounts received in excess of the loan amounts required to be paid off is an equity due the borrower. I know there is a guru system about buying notes, foreclosing and taking the property, rather stealing the property, but you can easily get hung if the property sells for a higher amount at the foreclosure sale.

Not real clear about some comments, but the first mortgage usually must be paid off in cash at the time of the foreclosure. Now, some lenders will allow an assumption of a first mortgage by an individual holding a second when the borrower provides a deed-in-lieu-of-foreclosure (DIL). With a DIL, the note holder will take title to the property without having any requirement to pay the borrower for any amounts received from the next sale. The property is full payment for the cancellation of the debt, like a trade, so there is no deficiency. Also, most state laws will not allow any deficiency judgment arising out of a seller financed note, since it was an amount of equity financed based on an agreed sale price. Good luck, Bill

Bryan Hancock · Answer

If the 2nd is delinquent they can foreclose.  I recently did this with a wrap note where I was the 2nd lender.  
          
          What is the nature of the transaction?  Is the 2nd currently delinquent and the 1st is current?  Is this for a seller you are working with?

Can a 2nd mortgage foreclose if the 1st is current?

Most Popular Reply