Category Archives: Foreclosure

What Happens If I Stop Paying on My Second Mortgage?

second mortgageTwo questions clients commonly ask me are:

 

If you are delinquent on your first mortgage, soon or later, your mortgage company will initiate a foreclosure process. How long you can live in your home after you stop paying your mortgage varies greatly from lender to lender, your geographical location and other factors. I’ve seen clients not receive the Notice of Sale (this is the notice letting you know the location, time and date when your home will be sold) for years in certain cases. I suspect that as housing prices recover, especially in the San Francisco Bay Area, banks won’t wait around as long to foreclose.

What happens if I stop paying on the second mortgage? Second Mortgage Can Initiate Foreclosure!

Some clients mistakenly believe that only the first mortgage can foreclose on the property. Not so! Both the first and the second mortgage can foreclose if you miss payments. However, even if the second mortgage forecloses, it will only get paid after the first mortgage.

Let’s take an example:
You have two mortgages on your home with the following balances:
1st: $700,000
2nd: $100,000

Now, let’s suppose the second initiates the foreclosure and your home sells at auction for $600,000. The second lender will get nothing because the first mortgage is first in line to get paid. Since the sale price wasn’t sufficient to cover the first mortgage, the second gets $0. For this reason, it is less likely that the second mortgage will foreclose if your home is underwater.

However, let’s suppose your home is worth $900,000. In this case, the second is a lot more likely to foreclose since it would recover all of its money.

Can Chapter 13 Get Rid of Second Mortgage?

Chapter 13 is a viable way to save a home in many foreclosure situations. In Chapter 13, you propose a Chapter 13 plan where you repay your mortgage arrearages (missed payments) over up to a five year period. For example, if you owe $30,000 in back mortgage payments, you would propose to repay $500 per month ($30,000/60 months) in order to get caught up on your mortgage.

Chapter 13 may also allow you to get rid of your second mortgage once and for all through a process known as “lien strip.” Chapter 13 lien strip is only allowed in the following situation:
Your second mortgage is unsecured. In general, this means that the fair market value of your home is worth less than the first mortgage balance. For example, your home is worth $500,000 and your first mortgage balance is $650,000. This would make your second mortgage “unsecured” no matter how much your second mortgage loan amount because the first mortgage absorbs all value and leaves nothing for the second.

In this situation, we can file a Motion to “strip” your second mortgage. In order to do the lien strip, you must a) file Chapter 13 (not a Chapter 7) and b) make all of your Chapter 13 plan payments. In general, a Chapter 13 plan will last for 3 or 5 years.

As the housing prices continue to rise in San Francisco Bay Area, it will certainly become harder to lien strip since more second mortgages will be secured. In order to strip the second mortgage, the entire second mortgage balance must be unsecured. So, if you owe $600,000 on your first mortgage and your home is worth $600,001, you’re out of luck.

Of course, valuing your home to the exact dollar is difficult, especially in this market but that’s a topic for another post.
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What happens when you stop paying your mortgage?

when to stop paying your mortgage

By: Jeena Cho

A very common situation I come across is where the client is struggling to make all of her payments, including mortgage, car, credit card, and living expenses. So, a question that comes up frequently is what happens when I stop paying my mortgage? The answer depends on if you stop paying on your first or second mortgage.

Defaulting on the first mortgage

Let’s suppose that you’re delinquent on the first mortgage. Typically, after 3 – 6 months of missing payments, the lender will send you a Notice of Default. This puts you on notice that you are delinquent and that the lender intends to accelerate the terms of the note. Meaning, instead of making your normal monthly payment of say $3,000, the bank is demanding the full loan amount.

This is the time where you need to have the hard conversation and ask yourself “can I really afford to keep this home?” In my experience, many people have other debts aside from the mortgage, such as credit card payments. Oftentimes, if the client didn’t have the other debt, he or she would in fact be able to make the mortgage payments.

After the Notice of Default, you’re typically given about 3 – 6 months before the lender sends you a Notice of Trustee’s Sale. This is where the lender tells you the date and time of when your home will be sold off. Note that it may take the lender a lot longer than 3 – 6 months before sending you the Notice of Trustee Sale. I’ve seen many clients who are delinquent on their mortgage who still has not received the notice after 12 months.

The Trustee Sale has a minimum notice of 21 days. On the foreclosure date, your home may be auctioned off. I say may because I’ve seen situations where the bank will either cancel the auction date or the home isn’t sold on that date for various reasons. Of course, there’s also the possibility that your home will be auctioned off on that date. After the auction date, if you’re still living in the property, the bank can proceed with its eviction process.

Defaulting on the second mortgage

Many people purchased their home by taking out an 80/20 loan or have pulled equity out of the home later. In this situation, you have both a first and a second lien. So, the next common question I get is “what if I’m current on my first mortgage but missed my second mortgage?”

The answer to that question really turns on what if anything the second mortgage lender would get if it initiated the foreclosure. It’s important to note that regardless of which lender initiates the foreclosure – first or second, the first mortgage will always get paid first. The second mortgage may initiate the foreclosure and get nothing from the transaction. As a practical matter, unless you have equity in your home (e.g., your combined mortgage is $500,000 but the fair market value is $550,000), it is unlikely that the second mortgage will initiate the foreclosure.

What I have seen in my experience is that after some period of delinquency, the second mortgage company will sell the debt to a third party debt collection agency. The third party debt collection agency will then attempt to collect the debt from you. It may be possible to settle your second mortgage for less than what you owe on it.

Please note that foreclosure process varies widely by State. The above information is based on California law.

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