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updated: 2/12/2011 5:55 PM

Second mortgages can follow homeowners after foreclosure

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Q. My husband lost his job about a year and a half ago and as a result, our house was foreclosed. We had two mortgages on the house. We decided not to fight the foreclosure and we ended up just moving out. We got some final papers from the mortgage company and we thought that was the end of it, which was bad enough.

We just got served some papers from the sheriff. It looks like we are being sued by the mortgage company that had our second mortgage. We thought that by giving the house back, that would be the end of it. Now we are being sued for more than $40,000. I cannot believe we have to deal with this again. Of course, we don't have $40,000, but is this legal?

A. I am guessing what has occurred is that the first mortgage company foreclosed your mortgage. The papers you received probably include a judgment for foreclosure.

When the first mortgage company forecloses it's mortgage, any subsequent lien holders (second, third, etc. mortgage holders) must make a decision. They can pay off the first mortgage, thereby replacing the first mortgagee as the primary lien holder, or not pay off the first mortgage. If they choose not to pay off the first mortgage, their interest in the property is foreclosed and terminated as yours was.

This becomes a business decision for the second mortgagee. For example, say the first mortgage is $200,000 and the second mortgage is $50,000. If the property is appraised for $190,000, there is no benefit to the second mortgagee to pay off the first mortgage and assume primary lender status. Why? Because now, the second mortgage company is out the $50,000 they are owed plus the $200,000 they paid the first mortgage company, for a total of $250,000. Why spend $250,000 to own a $190,000 piece of property?

Now, let's take the same scenario but assume the house appraises for $240,000. In this situation, the second mortgagee may be inclined to pay off the first mortgage because if they can sell the property for $240,000, they will recover at least part of their $50,000 loan.

Addressing your question, when the second mortgage company's rights in the property were extinguished by the foreclosure, all that meant was they lost their security interest in the property. However, remember, when you take out a mortgage, you sign a note. The note is the obligation. The mortgage secures the obligation with property.

Just because the security goes away doesn't mean the obligation goes away. That is what is probably happening to you. The second mortgage company is suing you on the note you signed with them. Yes, it is legal.

I would contact an attorney to discuss your options. The mortgage company probably understands you are not in great financial shape, otherwise, you would not have lost your house. These types of suits can often be settled very reasonably. Another option is to discuss this with a bankruptcy attorney. If the second mortgage company believes you are on the brink of filing bankruptcy, they might become very reasonable in negotiating a settlement.

• Send your questions to attorney Tom Resnick, 345 N. Quentin Road, Palatine, IL 60067, by e-mail to tdr100@hotmail.com or call (847) 359-8983.

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