Will the 2nd lender foreclose if my house is worth no more than what is owed on the 1st mortgage?

Question

I owe $500,000 on my 1st mortgage. And I owe $125,000 on the second. The market value of the house is maybe $500,000. A house down the street sold for $520,000 four months ago. Three houses down from our house is another house that sat on the market for $460,000 for six months - that owner finally moved out one day and the front lawn is now brown with a Bank Repo For Sale sign up for the last four months. So even if my house were sold for $500,000 there would be nothing left over for the second lender much less any fees involved for the sale. So why would a second lender foreclose in this situation - when they get nothing in return? Wouldn't this cost them money to foreclose? Wouldn't the 2nd lender lose their $125,000 plus the costs to foreclose? How could they possibly benefit from a foreclosure? Wouldn't they rather try to work out some re-payment plan instead?

Answer 1

No, they can't foreclose on your home unless you are behind in payments. A drop in the value of your home is only a decrease on paper, not an actual loss that you or the lender has incurred.

The bank may loan you money based on your equity at the time you are given the loan, but you don't have to keep up that amount of equity in order to keep the loan. The bank wants the loan paid back over time, to collect the interest, so they would gain nothing if they foreclosed. And they could probably care less what the value is as long as you are making on-time payments.

If the house is already behind in payments, they may be aware that they'll get absolutely nothing in a foreclosure. They would definitely rather work out some sort of repayment plan, especially if they know the current value of the property (and you can show them with comparables, an appraisal, etc.). There's no reason for them to foreclose and voluntarily lose money.

Answer 2

In general if a borrower defaults on the mortgage payments the lender(s) has the right to foreclose on the property.

If there are two or more mortgages and there is a payment default and then foreclosure, the taxes get paid off first, then judgements, then most recent lender is paid off followed by the next lender. If the lender cannot be paid in full, a deficiency judgment may filed by the lender against the defaulted borrower. A lender, starting with the most recent lienholder not paid in full, gets to keep the title to the property.

A junior lienholder would obviously order a title report to disclose any unpaid lienholders and any other financial claims against the property. A decision would be made as to the feasibility of paying off the senior lienholder and other junior lienholders.

Answer 3

Here is the problem with your scenerio:

You can't SELL it for $500,000 b/c the bank that holds your second mortgage will NOT allow the sale to go through...they will not allow a new mortgage to take a senior position on title...and that means that a BUYER for your home WILL NOT be able to get a clear title.

Don't think that you can just walk away from it...ever hear of a deficiency judgement? They can actually take you to court and force you into bankruptcy right after the foreclosure...which means that it can be as long as 10 years before you can buy another home...b/c two major financial "life events" is a no-go for almost all lenders.

In your case, a lender will most likely NOT entertain a short-sale.

Answer 4

2nd is able to foreclose!!!! If the 1st forecloses before the 2nd the 2nd will loose out. Usually the second will foreclose or buy it at auction. Once this takes place and you happen to foreclose and the balance left on the foreclosure after it is purchase at the CURRENT MARKET value, lets say $450K now you have a unseen tax gain of $175K plus cost incured by foreclosure (attorneys fee, documentation fee, real estate agent fee, ect......) and the bank/lender write off the amount on their taxes. The Gov't will come after you on the $175k tax gain.

Hope all goes well....

Answer 5

As long as you are paying the loans they have no incentive to foreclose, and no incentive to work out a re-payment plan.
They are in a bad situation, but yours is worse.
Say they foreclose, the cost of the process and selling the house leaves them with little or no profit....you still own them the $125,000.
So they don't "lose" until you declare bankruptcy. They just have a bad loan on the books.
If they re-negotiate with you, what incentive do other borrowers have in paying and staying current?

Answer 6

Yes they should try to negotiate with you rather than not get paid. Depending on where you are, you can not sell your house with a second mortgage on it. You can not get clean title to it to sell. Another buyer can not get financing for it without getting title insurance and it will show that you have a lien on the house in favor of the second mortgage. You will probably have to show that you will clean up both mortgages with one sale.

You could try to get someone to assume one or both but that would be tough. You may end up threatening both mortgages with foreclosure if that is your only option. You are upside down my friend.