Posted by David Butler on August 03, 2003 at 19:04:57:
Hello Mary,
Actually, an attorney’s office is the best place for this type of question - as it applies SPECIFICALLY to your present situation! However, we can try to cover a few of the generic basics.
Q. I have a 2nd mtg on a single family home that baloons NOW! If I can’t pay it off what recourse does the person holding the mortgage have.
A. In your specific situation, it generally depends on two things…
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what does the note and 2nd mortgage agreement state will happen in the event of default? That is controlling in the nature so far as it is compliance with what…
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the state laws regarding foreclosure on that type of property, in the state where the property is located, and, and state laws related to
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balloon payment clauses in notes secured by that type of property.
So, you’ll need to read the agreements you made, when you accepted the loan that is secured by the 2nd mortgage. Then, check with your own attorney if you have questions about what you agreed to, in relation to the 2nd and 3rd issues I mentioned above.
Now… generically speaking in the broadest of terms,
Q. My 1st mgt is current. Can they force a sale?
A. Yes… but first, they must go through the state proscribed foreclosure process determined by the mortgage instrument and state laws related to that instrument.
Q. I know my 1st mtg holder and they may not want to cooperate with the 2nd holder.
A. Irrelevant. 2nd holder essentially has the same rights as the senior debt holder, subject only to the rights of the senior debt holder. To protect their own rights, the junior holder does have to protect the rights of the senior debt holder. But, the senior debt holder has no right to interfere with the contract rights of the junior debt holder.
Q. I always thought that as long as your 1st mgt was current the 2nd holder could do nothing but wait until the 1st was paid off and then automatically fall into 1st place and then foreclose.
A. Nope. In fact, most junior position mortgages generally even contain language that if the senior debt is not paid, but the junior is current - the junior note is in default too… fact of the matter is, if it were anywhere near what you are thinking - nobody would ever loan money secured by a junior position note - and that’s not good business for either lenders, or borrowers desiring such loans!
Q. Could someone give me details on what could happen?
A. That could require an entire afternoon… so I’ll address the simplest, and possibly some one else might offer some alternative scenarios. Assuming that everything is in order, and the loan was made in full compliance with state law where the property is located (including state and federal consumer protection laws, RESPA, etc.), the mortgage holder can file a notice of default, and proceed with foreclosure according to your state’s laws. Once the proper notice periods and statutory times have elapsed, and the action has gone through to foreclosure sale, the property is then put up for sale, and sold to the highest bidder - subject to the senior loan still being in place. If that highest bidder is the loan amount owed to the 2nd note holder, he will become the property owner. If another buyer bids more, the 2nd note holder will be paid from the proceeds, and any excess goes to you.
In either event, the winning bidder will be subject to whatever “right of redemption” is proscribed by your state laws, according to the type of security instrument that was used.
Okay… this should give you some adequate information to start from - and best wishes in resolving the matter in a fashion that will provide you with the best possible outcome under what appears to be some trying circumstances.
David P. Butler