Second Mortgage Foreclosure

Defaults of second mortgages and other junior mortgages are handled exactly in the same manner as conventional first mortgages. Here, however, the relationship is usually between two individuals rather than between an institutional lender and an individual borrower.

A second mortgagee will usually seek the counsel of an attorney to manage the foreclosure process against a second mortgagor. The delinquent borrower will be requested to cure the problem within a certain time period. If a cure cannot be accomplished, notice is given to all persons having an interest in the property, and the attorney then files for ju-dical foreclosure.

The second mortgagee generally is the original bidder at the public sale and secures ownership of the collateral property subject to the lien of the existing first mortgage.They can then continue to maintain the integrity of this first mortgage by making any payments required, while seeking to sell the collateral to eliminate, or at least offset, any losses.

Deficiency Judgments

If the proceeds from a foreclosure sale are not sufficient to recover the outstanding loan balance plus the costs incurred as a consequence of default and interest to date, a lender may, in most states, sue on the mortgage for the deficiency.

If the foreclosure is by court order, the judge normally awards the lender a judgment against the debtor in the amount of the deficiency. If a power of sale foreclosure took place, the lender must then file suit against the debtor to collect any deficiency.

Texas

In Texas a lender would consider several things before pursuing legal action for a deficiency balance since the amount of the deficiency and the ability of the debtor to pay after the suit would be important factors.

The homestead laws in Texas, and most other states, would protect most of the debtors basic possessions from this type of judgment. In most cases a defaulted borrower does not have any nonexempt assets to

make up this deficiency. Otherwise, they would have been put to use in order to prevent the default in the first place.

Current Trend

The current trend is to rely less on collecting deficiencies and more on limiting a borrowers personal liability on a real estate loan to the equity in the collateral property. Especially on purchase money loans, lenders may be limited to recovering only the collateral property and nothing more.

One reason for this trend is the tendency of a deficiency judgment to penalize those borrowers who make good on their debts. Because such judgments can become liens against any property a borrower holds or may acquire in the future, dishonest debtors may avoid payment by simply making certain they do not own any property in their own names.

Summary

This chapter provided an overview of the foreclosure process. By far the greatest number of real estate financing arrangements do not result in problems leading to foreclosure. Rising property values coupled with the systematic repayment of loans create measurable equity positions for the borrower. A troubled borrower can, in most problem situations, arrange to dispose of assets and thus maintain financial equilibrium.

This is what gives you, as a real estate investor, an opportunity to help someone in financial distress and still make a profit. When misfortune cannot be averted and foreclosure develops as the sole remedy, this may provide the motivation to the borrower to be open to your help.

Lender Adjustments

A lender will usually attempt to adjust the conditions of a loan in order to help a troubled borrower over short-term difficulties. Delinquent mortgage payments are the most common cause for a default. The nonpayment of property taxes or hazard insurance premiums, lack of

adequate maintenance, and allowing priority liens to take effect are also cause for default.

To offset the possibility of a foreclosure on delinquent mortgages, many lenders will exercise forbearance and waive the principal portion of a loan payment for a while or even extend a moratorium on the full monthly payment until a borrower can better arrange their finances. Other adjustments in terms of a delinquent mortgage that might aid the defaulted borrower include an extension of time or a recasting of the loan to reflect the borrowers current ability to pay under circumstances of financial distress.

Deed in Lieu of Foreclosure

Sometimes all efforts at adjusting the terms of a mortgage to solve a borrowers problems fail. A lender may then attempt to sell the loan. This creates further opportunities for you as a real estate investor. If the lender cannot find a buyer willing and able to buy the loan, the lender may seek to secure a voluntary transfer of title to the property from the borrower. This action prevents the possibly costly and time-consuming process of foreclosure.

By executing either a quitclaim deed or a grant deed, a borrower can eliminate the stigma of a foreclosure suit, maintain a respectable credit rating, and avoid the possibility of a deficiency judgment. Real estate lenders are fully aware of the difficulties with evictions and the costs and time involved in a full foreclosure process. Most often, the lender encourages a hopelessly defaulted borrower to transfer a deed voluntarily.

However, the lender must take care to be protected against any future claims of fraud or duress by the borrower. We will talk about this further when we discuss negotiating with the seller in pre-foreclosure in Chapter 8. In addition, the lender must be aware of the possibility of the existence of any other liens against the property. A quitclaim deed does not remove junior liens as does a completed foreclosure.

Use this chapter as your reference guide. In Chapter 3 we will show you how buying foreclosures allows you to acquire real estate at a wholesale price.