I own a second mortgage that isn't paying, what to do?

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I own a second mortgage that isn't paying, what to do?

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Specialist · San Antonio, TX · Member since 2012 · 865 posts · 351 votes
A few years ago I sold a house to a couple that asked me to take back a second, since they could only quailfy for a 80% loan. I did and now they have stopped paying me, but they are still paying the first wich is a local bank with 2 branches. I contacted a attorney to start foreclosure. Yesterday I get a call from the attorney's office telling me that the local bank said that they would call the first loan due if I foreclosed on my second and took the house back. I had heard before that a second or junior lien holder could legally a make the payments on a senior lien in order to protect their position. My attorney doesn't know if this is correct or not. So I need some advice above and beyond someone telling me go talk to an attorney.
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Account Closed
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
13y
Lenders in junior position who foreclose and take the property back subject-to a senior lien are not exempted from the due-on-sale clause. (See Garn St. Germain). So the due-on-sale clause can legally be triggered by taking the property back at sale or by a deed in lieu, whether or not you bring the payments current. The lender has the right to call the loan due based just on the transfer. The bank is letting you know they believe there is equity and that they will pursue it if there is a due-on-sale event. As a lender I'd do the same thing.

If I were you, I wouldn't foreclose unless I was sure I could pay off the first if they call it due....and there were enough equity to make the payoff worthwhile. I wouldn't play with wrap ideas if I knew the senior lender would prefer to foreclose.

Just my opinions.


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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y
    Originally posted by Dion DePaoli:
    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.

    I missed the part about the borrowers bringing the loan current on their last default 2 years ago. If that's so, why not just get them to bring it current now?

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y
    Originally posted by Joe Jones:
    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.

    Joe: There is nothing inherently wrong about foreclosing on a 2nd to get the property back. Getting properties back at sale subject to senior liens happens all day long. It's viable option as a jr. lender with a borrower in default and a viable investment strategy. The only glitch is that the senior lender doesn't have to accept payments from the new owner and has a right to call the loan due. So there's risk. IMO, most of the time there is very little risk. Your situation has a senior lender saying they want to call the loan due. Whether or not it's a scare tactic, it's worth paying attention to. And worth finding a lawyer who understands the law as it applies to your loan.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    I don't think so K., caught that. BTW, it is very difficult for a borrower in default to refinance, if it's over 90 days out, I'd say almost impossible except with a private lender or HML type. Any bank would want to see a significant reduction in payments to even consider it refinancing any loan in default. :)

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  • Dion DePaoliPro Member
    Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
    13y
    Originally posted by Joe Jones:
    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.

    Joe, you say in this post you have already been here with this couple. "2 years ago I started foreclosure and the couple came forward and paid me."

    Seems like you are getting a little ahead of yourself and it also seems like there may really be no reason to do so. Start at step one, which is send out your Notice of Default to the borrowers. When they reach out to you have a mature conversation about what happened on why they seemingly just stopped paying you. You might want to inform them, that the senior lender informed you that if you pursue a foreclosure, the senior lender will call the senior loan due. None of that is what they want. Maybe it's time to see if your Mortgage Servicer can do ACH and set them up on auto-payment. Or perhaps, you can work with them to either pay you in full or refinance.

    In loan disposition, the most important thing to do, is communicate with your borrowers. Delinquency and default and life can at times, be embarrassing for a person and unfortunately the reaction from time to time is stick your head in the sand. You have to lead the mature conversation, defaulting on your loan will result in you pursuing foreclosure. It sort of is what it is. So, how do we not go delinquent anymore?

    Until you get past that point, the rest of this is sort of a waste of energy and contemplation. If they didn't want their house, with equity, they would not be paying on the first either.

    If you are not comfortable with this, you should get a mortgage servicer who is willing to do these things for you. Of course, they charge for these things. I suppose there can be paralysis on the side of the newbie or part-time mortgagee. And you should really try and have some resolution to this specific matter before doing any service transfer, IMO. Otherwise, you will just loose more time arranging the transfer.

    Good luck.

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  • Dave Van HornPro Member
    Fund Manager · Wayne, PA · Member since 2009 · 1k+ posts · 1k+ votes
    13y

    Hi Joe,

    David Beard was right-- we do specialize in delinquent 2nds, with or without equity.

    If a re-performing 2nd goes non-performing again, it really goes back to the same process we use for all of our non-performing notes—trying to contact the borrower (phone campaign, mail campaign, door knock service, and starting the legal process).

    If we get a hold of the homeowner, we typically ask them three questions: What happened? Where are you now? What do you want to do?

    It’s hard for us to craft a solution, without finding the borrower’s pain, but this is usually an affordability issue, where we rely on borrower buy-in to set up an acceptable win-win solution for all parties involved.

    If we don’t get a hold of them, we continue down the legal path and continue to monitor the senior lien.

    If you need a foreclosure attorney to start the legal process in Mississippi, try our counsel: Wrighten Martin at [REMOVED].

    I hope some of this helps! And feel free to contact me if you have any questions moving forward.

    Best

    Dave

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