Aftermath of foreclosure and the second mortgage for RECOURSE mortgages/states?

[trapped.]

Hello everyone.
I love this forum! Been reading it for 6 months and love everyones stories - thank you so much for sharing them!

I have a question for those who have walked in recourse states or had a recourse mortgage, especially those with a second mortgage or heloc which become unsecured debt after foreclosure.

As far as the first mortgage goes, from my understanding (please correct me if im wrong) its a good chance that the process can result in no deficiency on the first.

i.e. if at the time of foreclosure the amount to cure the default accumulates to 300k (principal, past due interest, FC filing fees, etc) the bank often sets the starting bid at the amount owed (300k). so if there are no takers, the bank gets it back at 300k so there is no deficiency since by law the deficiency amount is the difference between the sale price and amount owned and they are the same its 0.

So assuming the risk of deficiency is not so bad on the first, what happens to the second?


it becomes unsecured debt. Do they typically send it off to 3rd party collections? Do they issue 1099s? I read a lot of stories of people negotiating the debt after 6 months or more of being late. I guess the main questions is why negotiate, just to get a "settled" mark on your credit report, to put it all behind you? It seems to me if your second is 40-60-100k , even if you settle at 10% its still 4-6-10k out of pocket a lot of us dont have.

So why not just ignore it forever until it goes away and hope the SOL expire?

Has anyone had the experience of dealing this way with the second, and what route did you go - 1099/ settle / ignore and why?

Another question: can they write off debt ONLY in the year they foreclosed? In other words, say FC happened in 2010, does that mean both first and second MUST give you a 1099 in Jan 2011. Or can they collect for 3 years and then 1099 you in 2013. Will in that case the tax break on debt forgiveness still apply?

[TomEason]

tapped
There have been a ton of posts made that will answer all of your questions. I suggest you go to the "search the forums" tab to find some. Also important; since each of the 50 states has their own statutes governing all the issues you've touched on, it's important, when seeking info, that you provide your state, your lender, your loan amounts, the value of your house, whether your loans were purchase money, etc. Good luck.

[trapped.]

I did use the search feature and sure this topic is discussed but a lot of the discussion has to do with settling the second while modifying the first and keeping the house or just defaulting on the second and staying current on first - then yes - you want to settle to remove the lean .

I am specifically asking about the scenario of a recourse second mortgage after foreclosure already happened - why would you settle the second at all (if its to avoid being sued, arent the chances very small) isn't it better to keep the 5-10k and risk it and wait for the SOL to expire? Just curious what people think about it?

also i didnt see any answer to the 1099 and the year its forgiven in - can the lender forgive it after the year FC happend ? After the law protecting us through 2012 will expire?

I see repeated questions asked on this forum all the time, I think my questions are not that typical and Id appreciate people sharing their experiences if they have them.

thank you!

[TomEason]

I did use the search feature and sure this topic is discussed but a lot of the discussion has to do with settling the second while modifying the first and keeping the house or just defaulting on the second and staying current on first - then yes - you want to settle to remove the lean .

I am specifically asking about the scenario of a recourse second mortgage after foreclosure already happened - why would you settle the second at all (if its to avoid being sued, arent the chances very small) isn't it better to keep the 5-10k and risk it and wait for the SOL to expire? Just curious what people think about it?

also i didnt see any answer to the 1099 and the year its forgiven in - can the lender forgive it after the year FC happend ? After the law protecting us through 2012 will expire?

I see repeated questions asked on this forum all the time, I think my questions are not that typical and Id appreciate people sharing their experiences if they have them.

thank you!

tapped
Thanks for your update. Sorry you couldn't find your answers. No, in light of your clarification, you wouldn't settle with a 2nd after foreclosure. I may have misunderstood your OP. Here's the deal on the specific scenario of a recourse 2nd, having been wiped out by foreclosure of the 1st, and hence becoming what is known as a "sold out junior." While the sold out junior is not legally barred from suing the borrower, I have seen no evidence of any sold out junior lender, in any state, sue the borrower. And, yes after a debtor's state's SOL runs its course, he will be in the clear. Bottom line, were it me, I would take the risk and not worry about it.

1099 is issued by January 31st following the year of FC, and when the debt is canceled. A taxpayer is protected under the Home Debt Forgiveness Act for foreclosures occurring up to 12/31/2012. And, I wouldn't be surprised if Congress extends the time.

[trapped.]

tomeason ,
thanks for your reply! It interesting that the sold out juniors dont typically sue. The debt becomes unsecured - which is essentially the same as a credit card.

However, I have seen a lot of people get sued by their CC companies - which are the same banks that service our mortgages: BoA, Citi, Chase, WF etc.

I wonder why the 2nd mortgage is different, it seems that the amount typically owed on 2nd mortgages is much greater that average CC debt, yet CC companies easily sue for 5-20k. With Second mortgages being 30-100k, why wouldn't they readily go after you? How are they different from CCs? Any thought on that?

[TomEason]

tomeason ,
thanks for your reply! It interesting that the sold out juniors dont typically sue. The debt becomes unsecured - which is essentially the same as a credit card.

However, I have seen a lot of people get sued by their CC companies - which are the same banks that service our mortgages: BoA, Citi, Chase, WF etc.

I wonder why the 2nd mortgage is different, it seems that the amount typically owed on 2nd mortgages is much greater that average CC debt, yet CC companies easily sue for 5-20k. With Second mortgages being 30-100k, why wouldn't they readily go after you? How are they different from CCs? Any thought on that?

trapped
You pose an interesting question, one which I've contemplated also. While I'm not sure of the answer, I can certainly agree with you that CC banks really don't give up easily on their collections efforts, even though, as you note, the balances are generally much smaller. I can only postulate that it comes down to ownership of the debt, along with the existence of CC collections infrastructure that's been in place for a long time at the banks. Whereas, the problem of sold out juniors, although now a big problem for them, is relatively recent phenomenon. The loan servicers might eventually ramp up enough to start these lawsuits - who knows? As far as ownership of the debt, the HELOC junior loans are generally retained in the bank's portfolio (not securitized and sold). On the other hand credit card debt is most often securitized and "strips" of the debt are sold to other debt owners. I imagine, the originating bank is pressured by the debt owners and related servicing agreement to recover those losses. I have a feeling the loan servicers plates are so full presently, that they haven't ramped up sufficiently to sue borrowers. Plus, there is more legal determination required on the deficiency of those loans, and also a pre-litigation analysis to determine if the debtor has sufficient assets to attach post judgment. But, these are all only educated guesses on my part. LOL!

[MargaretC]

Wow! I've been operating off the assumption that we would HAVE to settle our 2nd.

It sounds like we can just keep ignoring the collection calls and possibly, some day, the SOL
will run out and we pay nothing! (I'm not sure, but I think it may be 4 years in California.)

If Chase did decide to sue us, we could attempt to settle then, correct?

Thanks so much!

[TomEason]

Wow! I've been operating off the assumption that we would HAVE to settle our 2nd.

It sounds like we can just keep ignoring the collection calls and possibly, some day, the SOL
will run out and we pay nothing! (I'm not sure, but I think it may be 4 years in California.)

If Chase did decide to sue us, we could attempt to settle then, correct?

Thanks so much!

MargaretC
I'm assuming you still own the home (hasn't been foreclosed). In that case, Chase's remedy for your non-payment is foreclosure. Then, should they foreclose (which would be unusual since they're the 2nd lender), and should the loan be a recourse loan, they could then sue you. But this isn't happening. Yes, you're correct, the SOL in CA is 4 years. However, the 2nd lien doesn't go away, and will remain of record against your property. To remove that lien (for some homeowners who never plan on refinancing or selling, that may never be important) you may eventually have to reach a settlement agreement, whereby Chase agrees to reconvey the lien in return for you payment of the agreed amount.

[MargaretC]

We are still in the home, but are awaiting the NOD from the first lender, BofA. Will
the lien be removed when they foreclose?

Also, do you know when the clock starts ticking for SOL?

Thanks Tomeason!

[TomEason]

We are still in the home, but are awaiting the NOD from the first lender, BofA. Will
the lien be removed when they foreclose?

Also, do you know when the clock starts ticking for SOL?

Thanks Tomeason!

Margaret
You're welcome, and thanks for your followup post. Yes, the lien will be removed, because the property will be gone! The 2nd loan (and lien) is wiped out in the foreclosure by BOA. As such, Chase becomes a "sold out junior" and owner of an unsecured debt. If the loan is recourse, Chase could conceivably sue you, but lenders aren't currently suing borrowers on sold out juniors, even though not legally barred from doing so. The SOL will start running on the trustee sale date.

[barbj]

If you are just waiting out the SOL, how does that show on your credit report? Is that still reported as a late mortgage every month? Will you still be able to buy a house in 2-3 years or will that unpaid sold out junior prevent the new house?

[TomEason]

If you are just waiting out the SOL, how does that show on your credit report? Is that still reported as a late mortgage every month? Will you still be able to buy a house in 2-3 years or will that unpaid sold out junior prevent the new house?

Derogs can stay on credit report for 7-1/2 years from date of last activity on the account, under provisions of the FDCPA. However, sometimes a consumer can have it removed sooner, although the creditor has no obligation to remove it sooner. Credit reporting has nothing to do with the SOL; SOL is concerning lawsuits. Don't know the answer when a person can buy another house.

[trapped.]

I wonder if when looking up the SOL one should look up Promissory Notes or Written Contracts (these #s are different for some states)?

Or does the SOL for deficiency judgement after foreclosure apply in this case (i.e. if the first mortgage has 30 days (in some states) after foreclosure to file for deficiency does the same apply to the second even though they werent the ones who foreclosed) ?

[TomEason]

I wonder if when looking up the SOL one should look up Promissory Notes or Written Contracts (these #s are different for some states)?

Or does the SOL for deficiency judgement after foreclosure apply in this case (i.e. if the first mortgage has 30 days (in some states) after foreclosure to file for deficiency does the same apply to the second even though they werent the ones who foreclosed) ?

Just as each state has it's own SOLs, each state has it's own foreclosure statutes. It's easy to research your state's SOL starting with Google.

[MargaretC]

Another question - My second is w/ Chase and once we get foreclosed on by
BofA we will be moving back to our old house that we've been renting out.
The mortgage on that house is also w/ Chase.

Could that have any bearing on how things go as we continue to ignore the
bill collectors?

Thanks again!

[TomEason]

Another question - My second is w/ Chase and once we get foreclosed on by
BofA we will be moving back to our old house that we've been renting out.
The mortgage on that house is also w/ Chase.

Could that have any bearing on how things go as we continue to ignore the
bill collectors?

Thanks again!

Margaret
Don't worry. There's no connection, and those departments don't talk to each other. And to make your case even less worrisome, it's two different properties..

[still dealing with it]

Glad i found this forum while looking for help...I live in California and have lost my home to foreclosure. Thinking, time will pass, I will rebuild my credit score, and all will be good in a few years, I have chosen to close my eyes and let time go by and hope for all this mess to go away. With that being said, It's been about 6 years since date of last activity and still to this day have my second mortgage listed on my credit report as delinquent 120+ past due. I have taken my credit score for 320 credit rating and have brought it back up to 660 and have hope to sometime soon own my own home again. I recently visited a Lender and have been told I can't do anything with this current late status on my CR and was asked if someone else could purchase this home for me....are you freakin kidding me?? So does anyone know where or what to do from here?? A suggestion was made to file bankruptcy to get rid of this problem, but after waiting out six years, it will be hard for me to start this whole rebuilding my credit all over again. If this was gonna be the case, why didn't someone tell me to get rid of this debt a long time ago?? Pregnant, Stressed, and need help out of this mess....Someone please shed some light on me!!

[TomEason]

still dealing with it

Sounds like you'll be OK in a little over a year. Per the FCRA, the derogs can remain on a consumer's credit file for up to 7.5 years. Since it's been about 6 years for you, you're almost there!

Your 2nd is a SOJL, and since you're in CA where the SOL is 4 years, that 2nd lender can't sue you. Same timing on your credit file - 7.5 years.