Mortgage Lien

Your situation is sticky. You have three homes on the market and the equity in two appears to cover the balance of all loans. Unfortunately, one of your homes is in a deficiency status. You do not mention whether you are behind on any payments or whether any foreclosure proceeding are underway. I will cover liens, foreclosures, and deficiency balances to answer your question. A recent Bills.com resource discusses consequences on mortgage default if default is your only option.

Liens

A lien is an encumbrance -- a claim -- on a property, which is paid when the property is sold. This means when you sell your home, the lien holder would have claim on the proceeds of the sale to the extent that their debt is satisfied in full. If the amount of the judgment is more than the amount of equity in your home, then the lien may prevent the debtor from selling or refinancing until the debtor can pay off the judgment. Again, every state has its own rules about property liens, so debtors with a judgment against them who own property should review their state's laws to learn what a creditor can and cannot do to enforce its judgment.

See Bills.com resource State Consumer Protections Laws and Exemptions for an overview of each state's rules.

Foreclosure Process

Either the first or second mortgagee can initiate a foreclosure. The foreclosure process varies from state to state, but generally takes from two to 18 months. It all depends on the terms of the loan and local state laws. However, normally if mortgage payments are not received within 150 days, the bank can proceed with the foreclosure process. The second mortgage would be repaid after the first mortgage is paid in full.

In fact, if the sale price is less than the value of the mortgages held against it, then in some states the homeowner could still owe an unsecured balance called a deficiency balance or deficiency judgment. The good news is that this new deficiency balance (if it exists and if your lenders pursue it) is an unsecured debt that may be enrolled into a debt settlement program.

In some states (such as California) and in some circumstances, the second mortgage may be what is called a non-recourse loan. A non-recourse loan means that the lender has no recourse to collect any deficiency balance against the borrower. Its only recourse is the security on the property itself. You will need to review your loan documents and state laws to determine if your second mortgage is a non-recourse loan. Contact an attorney in your state who is experienced in property law to determine for certain if your mortgages are recourse or non-recourse.

Second Mortgage Foreclosure

According to Bills.com readers I have spoken to and corresponded with, second mortgagees will initially take a hard-line stance in negotiations with homeowners in default. However, once the mortgagee is convinced the homeowner is sincere in their inability to repay the second mortgage and are considering bankruptcy, the mortgagee's position will soften and consider a lump-sum settlement. Readers report that some second mortgagees will settle for 10 to 30 cents on the dollar, depending on the policies of the company.

In the interest of full disclosure, it is possible legally, although not practical economically, for a second mortgagee (sometimes called a junior mortgagee) to foreclose and preserve its interests in the property. The junior mortgagee may pay off the first mortgage to preserve its own interest on the property. Because foreclosure destroys all interests that are junior to the mortgage being foreclosed, the junior mortgagee has the right to pay it off to avoid being wiped out by the foreclosure. The home equity lender may pay off the outstanding balance of the first mortgage and be subrogated to the bank's rights against the debtor.

As this is written in early 2010, it does not make economic sense for a junior mortgagee to redeem the first mortgage because property values in many areas are far lower than the mortgage balances on the attached properties. However, when property values recover the economics of this equation may reverse and we may see junior mortgagees exercise their right to redeem.

Alternatives to foreclosure

An agreement between the homeowner and mortgagee to prevent the loss of a home is called a loan workout plan. It will have specific deadlines that must be met to avoid foreclosure, so it must be based on what the borrower really can do to get the loan up to date again. The nature of the plan will depend on the seriousness of the default, prospects for obtaining funds to cure the default, whether the financial problems are short term or long term and the current value of the property.

If the default is caused by a temporary condition likely to end within 60 days, the lender may consider granting "temporary indulgence". Those who have suffered a temporary loss of income but can demonstrate that the income has returned to its previous level may be able to structure a "repayment plan". This plan requires normal mortgage payments to be made as scheduled along with an additional amount that will end the delinquency in no more than 12 to 24 months. In some cases, the additional amount may be a lump sum due at a specific date in the future. Repayment plans are probably the most frequently used type of agreement.

Forbearance

In some cases, it may be impossible to make any payments at all for some time. For those who have a good record with the lender, a "forbearance plan" will allow them to suspend payments or make reduced payments for a specified length of time. In most cases the length of the plan will not exceed 18 months and will stipulate commencement of foreclosure action if the borrower defaults on the agreement.

Short sale & deed in lieu of foreclosure

You have several options if you either cannot afford your mortgage payments or wish to sell a house that has a market value less than the balance of the mortgage. You can do a short sale, deed in lieu of foreclosure, or walk away from the property and allow foreclosure.

A short sale is where the mortgage holder agrees to accept less than the balance owed on the mortgage at sale to prevent foreclosure. In a deed in lieu of foreclosure, the property owner surrenders the house to the lender voluntarily in exchange for the lender canceling the loan. You should pursue all available alternatives to foreclosure. To learn more about these two options, see Home Affordable Foreclosure Alternatives Program.

Deficiency Balance

If negotiating with the second mortgagor does not work, and there is a deficiency balance, then the creditor could put a lien on your other properties. Note, that a second mortgage is an encumbrance on the property that the loan was taken out on. However, if there is insufficient funds to pay off the second mortgage (first mortgagor has first rights to sale proceeds) upon sale of the property, a lien is possible on one of the other properties.

Analysis

Regarding your first question, as mentioned above it is possible for the second mortgagor, who will be left with a deficiency if there is a sale or foreclosure of that property, to ask a court for a deficiency judgment for the shortfall in the sale of the property. With the judgment in hand, the judgment-creditor would then have the right to ask the court to place a lien on one of your other properties.

It is impossible to predict whether the judgment-creditor would exercise this right. However, the fact that the mortgagor is stating it may exercise this right should put you on notice that it is at least aware of your other properties.

Regarding your second question, what you are asking about is commonly known in the law of real property as "providing a marketable title." A marketable title is free from liens or claims. A lien may prevent you from selling the properties if you do not plan to use the proceeds of the sale of the property to satisfy the lien.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com