Can my Second Mortgage Lender Foreclose on my Property?
Your second mortgage lender has as much right to foreclose on the property if you fall behind on payments as your original mortgage lender does. However, a second mortgage lender must pay off the first mortgage if they foreclose, so they will normally only proceed with foreclosure if your property is worth more than you owe on your first mortgage.
The more equity you have in your home, the more secure your second mortgage is, and the more likely your second mortgage lender is to pursue foreclosure. If your second mortgage holder thinks that they can get paid in full at a sheriff’s sale, they may be very aggressive in their collection efforts.
If your home is underwater, meaning you owe more than it is worth, your second lender is unlikely to pursue foreclosure because they will not get enough back from the sale to satisfy the debt. However, in those cases, they may file a lawsuit to collect on the Note instead of foreclosing.
Defenses to Foreclosure by Second Mortgage
Based upon increases in property values, old second mortgages that had disappeared are now coming back. They can be known as “Zombie Second Mortgages” because they had been thought to be long gone, and they suddenly appear and threaten to take everything. Hedge funds went around and bought a lot of these old mortgages for pennies on the dollar and they are now collecting. NJ courts have not made decisions on these cases. My goal for my clients is to take the offensive and try to get the lender to want to work it out with you.
Many times, no mortgage statements had been sent for several years and the homeowner may have believed that the second loan had been part of a modification of the first mortgage.
The mortgage is valid and can be foreclosed, even if it was part of a bankruptcy or no statements have been sent for more than ten (10) years. However, there may be a question about the amount due. For some loans, based upon federal law, the only reason a lender can stop sending monthly mortgage statements is because they “charged off” the debt. If the debt has been charged off, they are not permitted to charge interest and fees during the period of time that no statements are being sent.
It is possible to take an offensive approach and file a counterclaim against the lender for violating the NJ Consumer Fraud Act. They had been “lying in wait” and charging interest and fees without giving any notice, in addition to potentially violating federal law. That is an unconscionable business practice. If a homeowner had received notices, they would have had the opportunity to pay off the loan, or even file a bankruptcy to strip off this mortgage while the property was under water.
Additionally, it is possible to file Fair Debt Collection Practices Act (FDCPA) complaints against the mortgage servicer for trying to collect an amount that is not due.
What is a Second Mortgage?
A second mortgage is any other loan taken out by a homeowner on their home while still paying off a previous mortgage. When a homeowner takes out a second loan using their house as collateral, it can be known as a credit line, equity loan, or home equity line of credit (HELOC). These loans generally utilize the equity you have in your home.
A second mortgage can have a shorter term and higher interest rate than your first mortgage, but they allow you to access a large amount of money at once (sometimes up to 90% of your equity). This leads many people to use second mortgages as a way to consolidate different types of debt, such as mounting credit card bills.
What is a Lien?
A lien is a legal claim or right to assets that are being used as collateral for a loan or debt. In other words, a lien gives lenders the right to seize your property if you default on your loan. For example, a federal tax lien is a legal claim to your property created when the IRS assesses a tax debt.
Loans that use your house as collateral, otherwise known as your “second mortgage,” are considered to be liens on your property. A lien will remain on your home until any and all of your loan balance is fully paid off.
What Happens to My Second Mortgage if My Original Mortgage Lender Forecloses?
Many homeowners believe that If your original mortgage lender forecloses on your property and your home is sold at a sheriff’s sale, your second mortgage is satisfied. This is not the case. The mortgages, judgments, and liens that were placed against the property after the first mortgage will be extinguished by the foreclosure, but that is only to create a clear title to the property for the new owner. You still owe those debts.
When your property is sold at a sheriff’s sale, if there is enough to satisfy the first mortgage, the remaining funds are available to pay other liens according to priority. Lien priority is usually determined by which one was recorded first. So, if an investor buys the home at sheriff’s sale, the funds will first go to the foreclosing lender. If it is enough to pay that loan in full, the Second Mortgage holder has the right to apply to the Court to obtain these Surplus Funds.
My Second Mortgage Lender is Suing Me. What Should I Do?
If you are being foreclosed or sued on a second mortgage, contact us today. At the law office of Ira J. Metrick, we will review your case and help you understand your rights and options for your situation.
