This article is written by Peters and Associates
Question: Back in 2009 when the economy tanked, I took a pay cut at my job and couldn’t afford to pay my mortgages. In 2013, I got a loan modification on my first mortgage and have been making payments on it for the past two years. Now, my second mortgage is threatening to foreclose. They tell me that unless I pay six years of past-due payments, they’re going to take my home. Can they do that? I thought second mortgages can’t foreclose. Please help!
Lenders that hold liens in second position, often referred to as second mortgages and/or HELOCs, typically have the right to foreclose on a home when the loan is in default. Collectively, all nonpriority liens placed after a first mortgage are called junior mortgages, and lien holders generally have the right to foreclose when the repayment terms are not met.
That said, it isn’t so much that junior lien holders can’t foreclose. A more accurate statement is that second lien holders typically don’t foreclose. The reasoning is simple.
NRS 40.462 explains how the proceeds of a foreclosure auction are distributed to various lien holders. Essentially, mortgage liens are paid in the order they were recorded on the property. The first mortgage is paid first, the second is paid second and so on. So, for example, if a first mortgage holder is owed $150,000 and the second mortgage holder is owed $50,000, there is no benefit for the second mortgage holder to foreclose unless the house will sell at auction for more than $150,000.
In other words, unless the sale price on the foreclosed property is higher than the first mortgage, the second mortgage holder won’t get any money, even if it were to foreclose.
Applying this to what happened recently in Nevada, lenders with second and third mortgages on properties that had values less than what was owed on the first mortgage wouldn’t foreclose. Instead, they waited until homeowners modified their first mortgages, often lowering the amounts owed on the homes, then waited until property values recovered enough that foreclosure would get them paid — at least in part. Now that home values have risen, junior mortgage foreclosure is becoming more common.
This isn’t the end of the world, though. Junior mortgages can be modified and/or reinstated. In some cases, it also is possible to settle the balance for pennies on the dollar or get them stripped entirely with zero cash out of pocket.
If you are going to pursue one of these alternatives, I’d urge you to act quickly before home values rise too far. The less your home is worth, the greater the chance to work something out with your junior lender.
Please note: The information in this column is intended for general purposes only and is not to be considered legal or professional advice of any kind. You should seek advice that is specific to your problem before taking or refraining from any action and should not rely on the information in this column.