Where’s My 20?

QUESTION:

I have an 80/20 mortgage. The 80 first loan is being foreclosed, but the 20-percent second loan still is outstanding, and payment is being demanded. This is different than the situation you recently described where the second lender foreclosed but the first did not. What happens now?

ANSWER:

Imagine that you bought a $300,000 property with a $240,000 first loan and a $60,000 second. You’re not paying the first loan so the first lender forecloses. If the property finally goes to foreclosure the first lender will bid for the property – usually just enough to cover their debt, say $240,000 for purposes of illustration but maybe less today. If another bidder makes a higher offer the property will be sold and the first lender will be paid off. If no higher offer is received the first lender will get title to the property and the second lender will be wiped out.

The second lender in this situation might bid at the foreclosure auction to gain title, but without equity this seems pointless. The second lender in many states also might file a deficiency claim against the borrower for any unpaid debt, but if the borrower has no assets or income why bother?

If the property was owned as a prime residence then any unpaid mortgage balance is likely to be untaxed. However, if the property is owned by an investor then it’s possible that unpaid loan debt will be seen as “imputed” income and subject at least to federal income taxes. See a tax professional for details.

Is there any good outcome in this situation? The owner might try for a loan modification under the government’s Making Home Affordable plan, but if equity or income are insufficient, that may not work. For details, visit MakingHomeAffordable.gov.

In addition, speak with a foreclosure-defense attorney. Ask about rules and court decisions in your jurisdiction and the obligation of the lender before foreclosing to mediate, offer a modification and show “standing” as the note owner.