If a homeowner has 2 mortgages (from bank X and bank Y) and is current with X but not with Y. I know that Y can foreclose for the amount owing.
What happens to X? My understanding was that the first takes priority so they would get paid first. But X does not want the foreclosure, especially if the property is sold for less than what is owing on the first.
Before the sale, X has the right to make Y current. In reality they don’t.
After the sale, Y is wiped-out, all junior liens are wiped-off the property and paid from overbid. All unpaid junior lien balances are still owed by the borrower.
The winning bidder at the sale owns the property subject-to senior liens. In this case X. X has the right to call the loan due, since title has transferred, but in practice rarely does.
Thanks for the reply. What you said makes sense but I do have a couple things I am still not clear on.
What is the incentive for Y to foreclose the loan ? I don’t see one unless they believe that the selling price will be high enough to pay off the first and have enough left over to compensate themselves. Is this faulty thinking?
In practice does a junior holder foreclose often? If they do is it so they can write off the difference (maybe going after the owner for the difference) and get the non-performing loan off the books?
It sounds even more imperative to do your due diligence on a home in foreclosure to make sure a more senior loan does not exist.
If Y goes to sale, X gets none of the sales proceeds. Sales overbid goes down, not up. What they do get is a new motivated owner, that paid cash to buy the house, that will make X’s backpayments and keep X’s loan current.
The reason Y would go to sale first is there is no guarantee that X’s sale, had it gone to foreclosure, would have enough overbid to pay Y all the money owed to them. By filing their foreclosure first they will either get all their money or get the house subject-to X’s loan. There’s a secondary market where you buy defaulted 2nd loans.
Does a junior holder foreclose often? Yes. If I held a 2nd I’d start foreclosure proceedings as soon as practicable. That is usually when the grace period has expired which can be as soon as the day after the payment was due. The mortgagor is required to pay all backpayments and legal costs (foreclosure, notices, etc.) to reinstate their loan. It’s really the only protection a junior lienholder has to safeguard their position. Most institutional lenders will wait 3 months so in reality a 2nd position probably has that long but they have to worry about junior lienholders below them because most defaulted owners stop payment on everything.
Due diligence is very important. I originally learned from two expert foreclosure buyers. I’d highly recommend getting some training if you’re going to get into this business.