I own a second mortgage that isn't paying, what to do?
Specialist · San Antonio, TX · Member since 2012 · 865 posts · 351 votes
Real estate gurus say all sorts of stuff as if its fact. I'd trust k. Marie on this.
Also keep in mind that foreclosures are expensive. All those costs get tacked on and can eat up a lot of equity. Nevertheless if there really is equity and it sells at the sheriff sale you will get paid off and the first will be the buyers problem.
Assuming your loan is recorded, you would get paid off if they sell. You should be able to add in interest and late fees, though a lawyer could better advise you.
Joe,
I'm in complete agreement with David. It's good to learn and understand all of the legality of it, but your best bet might be doing nothing. Maybe that will be your conclusion after you have dug into it with another attorney. Who knows? You might become an expert in seller carry back after you have gone through the process.
Cheers.
Have you asked your mortgagor to deed the house to you? If he said yes , would you want it?
Have you asked your mortgagor to deed the house to you? If he said yes , would you want it?
That would not work, they want to keep the house without paying me.
If the 2nd is causing you a headache sell it.
Joe Gore
The due-on-sale does not apply to junior lien holders, The bank does not have to allow you to assume the note, it is a violation of the first deed of trust.
In your case you can foreclose ask the trustee to bid amounts sufficient to pay all liens and pay them from sale in priority, look at your deed of trust and rights to pay liens and include funds expensed to safeguard your interests. The other lender won't get in your way or shouldn't. Otherwise, work it out. Your other options are to pay the bank off and then foreclose or obtain a deed from the borrower and then payoff the liens senior to yours.
Take what I said to your attorney, if he/she doesn't get it, find another attorney. Don't get legal advice here, I doubt anyone else has acted as a trustee. The other thing is that no one here is an attorney in Texas. :)
@Account Closed , here is my 2 cents. First each state has different laws and I am not familiar with the foreclosure laws in Texas so this advice might not be accurate in your state, so be sure to verify with an attorney in Texas. Second you have been given some great advice from @K. Marie Poe , and @Bill Gulley, and a few others. You have been given useless advice from some, and dangerous advice by others.
The normal way a second mortgage works is if it is in default and you try to foreclose unless first mortgage and you make an agreement, you must pay off first mortgage from all proceeds before you can get a penny. If proceeds are high enough from sale you get to keep everything over their mortgage payoff until yours is paid in full. If the sale proceeds are not enough to pay first mtg or first mtg bids their mortgage and are highest, you get nothing.
You might, depending on your mortgage terms be able to pursue them for a deficiency judgement. (That is the amount of your mortgage and costs less what you got from the sale.) If you do not have someone bid more than the first mortgage you need to be ready to bid the price of the first mortgage and your mortgage combined. this means that you have to pay first mortgage off to keep the property. Most states still have statutory redemption periods for borrowers so during that period the borrowers can come and pay off you and first mtg and get the money back. If there is a third mortgage, behind you, they can come in and buy you and first out to protect their mortgage.(Which would restart the statutory redemption period again).
You ABSOLUTELY need an experienced lawyer for this. If you do not understand the basic rules I listed above, there is absolutely no way you can do a foreclosure yourself. The construction rules of foreclosure are strictly construed. One screw up and you must start all over, and in some states pay fines or other penalties. If you go for a deficient judgement the rules are even more strict. Go to an attorney, if they cannot tell your exact situation after reading the first mortgage and yours in 15 minutes you have the wrong attorney.
BTW I am voting for Bill and K. Marie for their excellent posts and advice, and so should you.
The normal way a second mortgage works is if it is in default and you try to foreclose unless first mortgage and you make an agreement, you must pay off first mortgage from all proceeds before you can get a penny. If proceeds are high enough from sale you get to keep everything over their mortgage payoff until yours is paid in full. If the sale proceeds are not enough to pay first mtg or first mtg bids their mortgage and are highest, you get nothing.
I'm not sure about normal but that is not the way it works in CA. If second forecloses, title is given to the highest bidder on that (second) mortgage subject to the first mortgage. The first mortgage stays in place and, as K. pointed out, has the right to accelerate based on the title transfer, but this right to accelerate doesn't kick in until after the second forecloses and title has transferred. If, for example, a $10k second forecloses and the highest bid is $10k then that bidder gets title subject to the first. The first doesn't get a penny and stays in place.
Bill: did you mean to say that there is no DOS exemptions in Garn. St. Germain for jr. lenders taking back properties via foreclosure? The DOS clause applies to both the jr. lender and a third party party buyer if they are the winning bidder on a jr. lien foreclosure.
The OP needs legal advice specific to foreclosure and specific to Texas. The senior lender appears to be local and has apparently said they are interested is calling the loan due if he foreclosues on his jr. lien. That's not the same situation as taking over a property where the sr. lender is an institutional lender who may be plenty satisfied with uninterrupted timely payments. A senior lender saying they are interested in calling the loan due based on a jr. lien foreclosure is something to pay attention to.@Account Closed , I am only licensed in two states. Very often California law is extremely different from most states. I do not know Texas law but the general philosophy of the two states is extremely different. In my state filing a foreclosure on a second mortgage triggers the right of the first to accelerate and foreclose their lien. Perhaps the guy @Account Closed took a class from was qouteing CA law. Does California law allow the first mortgage to begin foreclosure due to 2nd mortgage foreclosing as a new owner violates the due on sale clause as @Account Closed explained? If so the second would still have to pay off the first if they foreclose as I have never heard of any state that doesn't extinguish junior mortgages when the first mortgage forecloses.
I was mainly addressing your comment regarding the first getting paid off when the second forecloses, in CA it doesn't.
In CA the act of beginning a non-judicial foreclosure (recording a Notice of Default) does not give the first a right to begin foreclosure. It's the actual transfer of title the occurs at the end of the sometimes lengthy foreclosure process that is a violation of the DOS clause in the first's note (if there is in fact a DOS clause in the note). As I understand it, Joe's guru is saying the opposite, the title transfer resulting from a second's foreclosure is exempt from the first's DOS clause, not true as @K. Marie Poe said. The first is not paid off. All liens junior to the foreclosing lien, the second in our discussion, are wiped off.
Here in CO junior liens are NOT automatically wiped out if a senior lien forecloses. Rather they have redemption rights. They're very short, 10 days or so. And if the junior lien doesn't redeem, then it is wiped out.
The senior loan stating their intention to call the note if the second forecloses, along with the history of this note (the relationship between the bank employees and the borrower and the bank encouraging the second) actually seems very shady to me. I think, @Account Closed that you may have been set up for failure from the start. Now the senior lender is threatening to foreclose if you do to keep you quiet. Seems like you're being coerced into a course of action that's not really in your interest.
I know Texas foreclosures go very quick compared to other states. Here in CO even if the first did start the process you would have sufficient time to get a buyer and pay them off before they could actually take the house to the sale. May not be true in TX. But would it be possible to line up a buyer to quickly buy the house after you foreclose? And, its entirely possible you won't get the house, if it truly has equity. Or, do you have the ability to get a loan to pay off the first after the foreclosure if you do get the property back?
To be clear, I'm not saying that initiating a foreclosure on a jr. lien in CA gives a senior lien the right to call the loan due or the right to foreclose. It's the actual transfer (trustee's deed or foreclosure deed) from the borrower/owner to a new owner that violates DOS. That's not a state law, that's Garn St. Germain, a federal law that spells out what violates DOS and what does does not.
All that being said, I have seen af few generic deeds of trust in CA, from national hard money lenders, that have clauses about defaulting on junior liens as cause for DOS. I have no idea if they are enforceable in CA.
After 10 days without redemption, does the junior have the right to pursue a deficiency judicially? In CA wiped off juniors can pursue judicially, but there is no right of redemption. This rarely happens however because of the costs involved.
The due on sale kicks in after the foreclosure, as title is transferred, the right of the first to foreclose is contained in the deed of trust prior to sale. The statute providing the rights for the due on sale (St. Germain) specifically exempts jr. liens as an encumbrance to title that gives any lender the option to proceed under the DOS.
After the sale, then the due on sale is applicable as there has been a transfer of title.
While the end result is the same, the basis to accelerate a senior obligation is different pre and post foreclosure.
Generally for any lien holder to foreclose, notice is required to all lien holders of record, in reality, proceeding with the consent of senior lien holders may be accomplished, with amounts bid in to pay all if agreed. As Jerry mentioned the after effects, one way or another the senior will need to be paid unless they agree to an assumption and some do agree and some states have assumption requirements, Missouri protected non-institutional holders (believe it or not, LOL, Mo! not sure if they still do. ). Large and medium size lenders will usually follow policy to the "T" small ones may be more flexible seeing what is in their best interests. Other than lender's policies I don't know of any requirement for senior or jr lien holders to call the obligation and proceed in any particular manner. :)
perhaps @Dave Van Horn can comment. He handles npn 2nds all day long by the hundreds. I know that they often initiate foreclosure to wake up a borrower that is paying the first and wants to remain in the house, but rarely have to follow through with the FC (just 10% of the time, I believe), so the legal expenses end up not being that great. And if they do take the house subject to the first, there are a range of options, including a normal sale or a quick sale (30 day sale price that is typically estimated by npn investors, perhaps 10% under market) among others.
I know Texas foreclosures go very quick compared to other states. Here in CO even if the first did start the process you would have sufficient time to get a buyer and pay them off before they could actually take the house to the sale. May not be true in TX. But would it be possible to line up a buyer to quickly buy the house after you foreclose? And, its entirely possible you won't get the house, if it truly has equity. Or, do you have the ability to get a loan to pay off the first after the foreclosure if you do get the property back?
Ample time here in CA as well. If you get a property back via foreclosing on a 2nd and the lender calls the loan due, it would be minimum of four months before the trustee's sale would be held. And that's assuming the sr. lender calls the loan due immediately after the jr. lien foreclosure and files a notice of default instantly, which in most cases isn't all that likely. Assuming there is equity, there's plenty of time to refi or prepare the property for sale. Or it used to be before the federal law requiring 90 day notice to bona fide tenants. The OPs situation has owner occupants, so they don't get much time here before the eviction filing.
If I were the OP, before I did anything else (besides trying to collect on the note) I'd be all over getting the values pinned down and looking at market conditions. Current FMV, what's owed on the 1st, who buys what at trustee's sale and how much they are paying. He can't really decide how to proceed without knowing if he's better off waiting for a payoff or attempting to take the property back. Of course, all of this could be moot if the borrowers just pony up their payments on the 2nd.Agreed David, there can be many options and work outs but such are usually reserved for institutional players, registered brokers, not so much for an individual DIY type as they don't want non-pros clouding the issues or messing up and having to start from square one again. But yes, there are many other ways to cure the problem to the satisfaction of all. Good catch! :)
K,
You are 100% correct.
Joe Gore
The property is in Mississippi, I should of stated that earlier. 2 years ago I started forclosure and the couple came farward and paid me. If the first let's me take over the payments I would come out fine if the couple doesn't pay me or if they did. There is a wide belief out even among realtors that if you allow a second lien and they don't pay then you can get the house back subject2 making the payments on the first and they will tell folks that all day long.
Why dont you just cash out the bank on the 1st.
Joe Gore
Why dont you just cash out the bank on the 1st.
Hey, Joe That sounds like a great idea as long as you supply the cash. I would walk before I got a loan in my own name or had to provide the cash to pay off the first. That was the reason I wanted to take over the payments on the first if I had to foreclose.
If you want to take over the 1st, I think the bank want to verify your income and do a credit check to verify you can make the payment. How much is your 2nd?
The OP already went through a NOD and was paid to bring the loan current. That is clearly the path here. The fear came in when the bank said they would foreclose. You let them spook you and stall your plans. Take the steps to secure your interests and enforce the remedies that are allowed. It is good to understand what the strategy may be for the first but you seem to have equity and you have borrowers who want to stay in their homes. Some of this is likely background noise. Send your default notice and reach the borrower and get you loan paid. If they don't bring it current, foreclose. If the first wants to rat race you on the matter, don't forget the borrower doesn't want to lose their property and could refinance both of you away.