!st and 2nd Mortgage and Foreclosure

[leedspaddy]

What is the name of your state? VT

Hi there, I currently owe $299K on my house which has fallen in value to around $260K. I am 6 months behind on my first mortgage and 4 months behind on my 2nd Mortgage. I am currently working with my 2nd mortgage holder to do a short sale as I have an offer on my house for $266K. I contacted my first mortgage holder to tell them that I have an offer on the house in the hope that this would stall the Foreclosure process. Before I got behind on my mortgage, the split between the mortgages was $239K 1st and $50K 2nd and so after doing the calculations of paying off the 1st mortgage and paying the realtor fee there will be nothing left for the second mortgage company with the offer of $266K.

So my first instinct was to call my first mortgage company back and ask them if they would waive the late fees, late payments and attorney fees and accept the original principle so that the second mortgage company would have some money and incentive to do the deal. I have to admit that I was shocked by their nasty refusal to even consider my idea. The thing is, I said to them wouldn't it cost them a whole lot more money to foreclose on my house than to waive the fees**************......I got no response.

So my question is this****************************.was I right to state that fact? By this I mean, if my first mortgage company wants to foreclose on my house wouldn't they have to pay off the second mortgage company in full to do so? If I am right the they would instantly lose $30K by doing this. I would really appreciate it if someone could explain to me how foreclosure works when there are 2 different mortgage holders on a house.

Thanks

[TheGeekess]

The first mortgage company gets the monies and the second comes after you until you pay it off.

[leedspaddy]

Originally Posted by TheGeekess

The first mortgage company gets the monies and the second comes after you until you pay it off.

I thought the purpose of a short sale was for the second mortgage company to accept the loss to allow the sale to go through?

[nextwife]

Originally Posted by leedspaddy

I thought the purpose of a short sale was for the second mortgage company to accept the loss to allow the sale to go through?

Uh, no.

The purpose of a short sale is for the lender who is foreclosing to take less than their payoff to avoid holding costs and attorney fees of a FC, and to come out ahead of where they would if they foreclosed and sold it themselves. The lender behind the first mortgage (see, they are "first") is the one with the problem. Realize that there are many places where the same lender holds BOTH the first and second. In those cases, they may decide to write off their second to accept a short sale. But, it's much harder to negotiate when two different lenders hold mortgages.

[leedspaddy]

Originally Posted by nextwife

Uh, no.

The purpose of a short sale is for the lender who is foreclosing to take less than their payoff to avoid holding costs and attorney fees of a FC, and to come out ahead of where they would if they foreclosed and sold it themselves. The lender behind the first mortgage (see, they are "first") is the one with the problem. Realize that there are many places where the same lender holds BOTH the first and second. In those cases, they may decide to write off their second to accept a short sale. But, it's much harder to negotiate when two different lenders hold mortgages.

Yes I know that is the overall purpose of a short sale but apart from the destruction of credit, what other consequences will I face if I manage to get this deal to go through? Geekness stated that the second mortgage company will come after me if and once the deal goes through**************.....is that right because I'm sure if that was the case most people would just walk away from the house?

[nextwife]

The advantage of a short sale is that you don't have a FC on your record and that the amount you end up owing does not have another 3-4,000 in FC atty fees ADDED to each mortgage.

[leedspaddy]

Originally Posted by nextwife

The advantage of a short sale is that you don't have a FC on your record and that the amount you end up owing does not have another 3-4,000 in FC atty fees ADDED to each mortgage.

So you are tellng me that I will end up owing my second mortgage to the bank in order for them to allow my short sale to go through? I'm sorry but I am having a hard time believing that because the one other consequence of a short sale is income tax on the money the bank waives in the short sale.

[rowz]

believe it.

A "First Mortgage" is has that name, why?.....cause it is the FIRST one you get and the FIRST one to get paid in a FC.

And yes, the IRS wants their share of the gift one is given where a lender forgives such a large amount of secured debt.

Good luck in this tough period of life.

[leedspaddy]

Originally Posted by rowz

believe it.

A "First Mortgage" is has that name, why?.....cause it is the FIRST one you get and the FIRST one to get paid in a FC.

And yes, the IRS wants their share of the gift one is given where a lender forgives such a large amount of secured debt.

Good luck in this tough period of life.

Well folks thanks for all the advice even if most of it was illinformed. I did some research and found that your information is out of date or simply wrong****************************..so I won't be looking for advice from this website again. First there is the Mortgage Forgiveness Debt Relief Act 2007 which will protect me from the IRS and secondly most mortgage companies have insurance to cover mortgage losses so I don't expect them to come after me. Thirdly, in order for the first mortgage to foreclose they would have to pay-off the second mortgage in full which will be a $40 K loss for them.However, I would like to thank those who took the time to reply to me.

[FlyingRon]

Originally Posted by leedspaddy

Well folks thanks for all the advice even if most of it was illinformed. I did some research and found that your information is out of date or simply wrong****************************..so I won't be looking for advice from this website again. First there is the Mortgage Forgiveness Debt Relief Act 2007 which will protect me from the IRS and secondly most mortgage companies have insurance to cover mortgage losses so I don't expect them to come after me. Thirdly, in order for the first mortgage to foreclose they would have to pay-off the second mortgage in full which will be a $40 K loss for them.However, I would like to thank those who took the time to reply to me.

You are the one that is seriously misinformed. Yes the relief act will keep the IRS from treating any mortgage forgiveness as taxable income. However, do not expect that the second mortgage company is going to roll over and cease to pursue a judgment against you regardless of what "insurance" exists.

The first mortgage doesn't have to pay off the second. I don't know where you got that ludicrous idea. Either the first or second can foreclose. The result of the foreclosure is that they are paid off from the proceeds in the order of loan seniority (the tax man first, then the first mortgage, then the second if anything is left). While the security interest in the property is then wiped out if the first forecloses, all the people who loaned you money still have recourse against you for the amount they are still owed.

The only thing others have told you that is the slightest bit screwed up and confused is that while the first mortgage company can agree to a short sale or not as it suits them (in which it would release any security interest in the property they have and the right to further pursue you), that would have no bearing on the second. Nobody in their right mind would buy a property at market value subject to a second mortgage. Suffice it to say unless you get all the lienholders to agree to sell short, you will not be able to.

[nextwife]

And many newer loans do NOT have PMI (that's the whole POINT of an 80/20 loan. And while a PMI company may have insured the lender to make them whole, that would merely create an assignment of the deficiency to a third party who then can still go after the borrower for reimbursement of the loss amount.

Where I work, IF the borrower comes to us very early on and really makes a good faith effort to sell and avoid default, or to give us the option of taking a DIL, we will sometimes agree to accept a DIL, and when we do, we will release the borrower. But that only works if we have both the loans or there's only one loan and no PMI.