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Home loan news: Defaults on second lien mortgages

[Dec 5, 2010.]


Second mortgages like home equity loans or home equity lines of credit are handled differently than first liens when it comes time to foreclose. Foreclosures and the mortgage defaults that cause them are still a big part of the woes of the housing market, and may be for some time to come according to experts at the Mortgage Bankers Association (MBA).

Different states have different policies regarding a bank's right to foreclose. If a homeowner walks away from his home, the bank may or may not have the right to sue for the full amount of the mortgage debt. Consider this question: If a homeowner abandons a home, and the bank later sells that home for $100,000, and the mortgage debt owed is $120,000, can the lender collect the $20,000 deficiency? The answer is sometimes yes and sometimes no.

Usually, in non-recourse states lenders cannot pursue full payment of the mortgage debt beyond the value of the collateral. In a non-recourse state it is common for the lender to suffer the loss. But this applies to first mortgages. Second mortgages can be quite different.

Florida, Arizona, and California are states which have high numbers of mortgage defaults. They are all non-recourse states. However, when it comes to second mortgages, Florida lenders cannot sue for a deficiency while Arizona and California lenders can. Even where two states have the same non-recourse policy, second liens may or may not be treated the same during foreclosure.

Homeowners who plan a strategic default further complicate the second lien foreclosure issue. It is one thing for a homeowner to default because of an inability to pay, for example due to a job loss. It is an entirely different matter when a wealthy homeowner stops paying because the investment is underwater.

The complicated issues surrounding foreclosing on a second lien, a bank's foreclosure rights in various states, combined with the homeowner's ability or willingness to repay the mortgage debt makes for a murky pond.

For more information, or to apply for home equity loans, follow the link.


About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.

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