The Mortgage Loan Hierarchy and How to Protect Yourself
Thursday, 02. 26. 2009 – Category: Second Mortgage
You should know that not all loans are created equally. In the case of mortgages attached to property, the mortgage that is first in line carries most of the clout. This does not mean to say that the second mortgage holder cannot foreclose; they most certainly can and will in some cases. It simply means that the process is more difficult for a second mortgage holder, as we will get into now.
What constitutes a first or second mortgage? It is simply determined by what mortgage lien gets recorded first at the county courthouse. On some rare occasions when a recorder or Title Company messed up the order or recording, it usually does not happen, but if it were to happen, it could cause a large mess somewhere down the road. The reason for the importance of who gets first position and what mortgage or lien gets relegated to the junior positions are basically two fold.
If a first mortgage holder proceeds with a foreclosure action and completes the process and the property is sold on the courthouse steps, all junior liens are wiped out, that is the first important reason for being in the primary position. The implications are that the first mortgage holder can now sell this property minus all other encumbrances. If the property winds up selling for much greater than the first mortgage balance, the junior lien holders may get some of their money from the excess funds.
You may be thinking why anyone would loan money and take on a junior position? The reason comes down to the perceived equity in the property and the risk the second mortgage lenders are willing to take. Keep in mind the second mortgage rates are usually substantially higher than first mortgage rates, so don’t feel too bad for them. They market hot and heavy to anyone who may have some equity and loan the money freely and some times easily, they are willing to live with the risk in an appreciating market and with the higher interest rates they charge.
With the relative flood of the 80/20 loan combinations out there, the 20% second mortgages are everywhere. It was a very popular financing product for the builders of the many new subdivisions being constructed and brought many more potential buyers into the market.
Since they are in the second position, the only way they would be able to avoid being wiped out at a foreclosure of the first mortgage is to show up at the courthouse steps at the foreclosure sale and completely pay off the first mortgage, including all the late fees, attorney fees and other junk fees tacked on. Once this is done, their second mortgage now bumps to the first position and they in essence own the property.
The second mortgage holder now becomes the first mortgage holder and owner of the property enabling them to dispose of the property in the hopes of getting their money back. This is all very good in theory, but does this actually happen and is a second mortgage holder willing to put up the kind of money to secure their second mortgage position?
I have seen representatives for many second mortgage holders refuse to believe that they would get wiped out if the first mortgage foreclosed. When you take into account the people I dealt with did not know the detail of the mortgage documents, their ignorance was really not their own fault. They were simply acting as collection agents and were simply not aware that all their huffing and puffing they were doing was actually kind of comical. I knew them being in the second mortgage position was not good and they were in deep fertilizer and had no easy way to tell them they were wrong and they would end up losing their money if and when the first mortgage foreclosed.
The reason for this lengthy discussion of what happens with the first and second mortgages is to let you know who is carrying the biggest stick. You should never be intimidated by a second mortgage holder anymore. They are in just as bad a position as you are if you are in default with the first mortgage holder. You may be surprised to know that some second mortgage holders don’t even know the first mortgage holder has begun to foreclose and that they are in jeopardy of getting wiped out if the property is sold at the courthouse steps. I have found that companies in the second position become very willing to get something out of their mortgage, even if it is 10 cents on the dollar. 10% of something is better than 100% of nothing.
The second mortgage holder may huff and puff and threaten to blow your house in, but all they carry is a lot of hot air. Educate them, keep all conversations civil since you may come back later asking for a discount and you never want to burn bridges. Threats by them will accomplish nothing if you know who has the power in the mortgage hierarchy. It will serve you in the long run to know who has the most leverage in your particular case.
By: Clyde R. Goulet
Clyde R. Goulet is the author of “The Survival Guide To Foreclosure” and the above article is a short excerpt from the book you can order directly from me at a reduced cost. Simply visit my website: http://www.freeforeclosurebook.com and I will send you the details via e-mail. Thanks.
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Tags: Debt Consolidation, Mortgage, Second Mortage, Secured Loan