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November 15, 2012 at 6:36 pm #479
A second mortgage lender could potentially write off the debt as a loss, seek a deficiency judgment, or continue to bill the borrower by turning the loan over to collections. There is no way to predict what a second mortgage lender will do. Depending on the way the loans were written and the state the property is located, deficiency judgments can be a possibility.
After the foreclosure, the first mortgage lender (also referred to as the primary lender) will sell the property at foreclosure auction. If there is money from the sale of the property, after the first mortgage is paid then the second mortgage will be paid as the secondary lender. If not, the second mortgage will be considered an unsecured debt. If the loan is a non-recourse loan (determined by the way the loans were written and the state the property is located) the second mortgage lender may write off the debt as a loss.
If the loan is a recourse loan, the second mortgage lender can still opt forgive the debt. The benefit for the lender to forgive the loss would be to receive a tax write off. In that case the borrower would be released from any legal liability. If they do not write off the debt, second mortgage lender may continue to bill the borrower for the amount of the loan. Some borrowers wait a month or so after the foreclosure to contact the lender to try to negotiate a settlement. Many borrowers have been able to settle their second mortgages for pennies on the dollar. Typically, these negotiations occur after the property has been foreclosed. If the second mortgage lender will not forgive the debt and will not settle, the debt may eventually be sold to a collection company which can potentially be settled as well. Collectors buy these debts for a percentage of the original debt and can usually be negotiated. Finally, the second mortgage lender can file a deficiency judgment against the borrower. At that time the borrower should speak with an attorney. There are options even after a deficiency judgment has been filed such as a response to the suit, bankruptcy, or ways to protect the assets the borrower has.
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