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How deed in lieu affects 2nd mortgage or junior liens

Author: Jessica Bennet
Community Mentor
Ask Jessica
Posted on: 05th Jun, 2007 06:30pm
A deed in lieu of foreclosure is where you deed the property to the lender if you can't afford to pay the mortgage(s) any more and no alternative option has worked out between you and the lender.

However, if you have 2 mortgages on the same property, you may be concerned about "How a deed in lieu affects junior liens?". Most lenders do not agree to accept a deed in lieu of foreclosure when there are 2 loans on the same property, because the junior liens aren't released from the property. That is, if the first mortgage lender accepts a DIL, he'll take over the property with the junior lien or second mortgage still attached and won't have clear title.

What happens to the second mortgage after a DIL on the first?


When the first lender takes over the property due to a deed in lieu, it becomes their responsibility to sell the property and pay off the junior lien because no buyer will purchase the property with a lien on it.

In most cases, when the first lender accepts a deed in lieu, they include a non-merger clause into the DIL agreement. This clause prevents the second mortgage lender from taking any legal action against the first lender if they don't pay off the outstanding balance on the second mortgage. But this doesn't mean that the first lender doesn't need to pay down second loan balance. It's the first lender's responsibility to pay off the junior lien if he agrees to a DIL unless they get an agreement with the second lender.

Moreover, if the first lender knows that they won't be able to recover the entire loan balance on the first mortgage then they will not accept the deed in lieu and foreclose. This occurs even if both mortgages are held by the same lender. This is how a deed in lieu affects the second mortgage or junior liens on a property. Though lenders are reluctant to accept a deed in lieu if there is a junior lien on the property, a deed in lieu has certain advantages because it's quicker and less expensive.

Related Discussion
Posted on: 05th Jun, 2007 06:30 pm
when you do a deed in lieu with the primary mortgage what happens if there is a second mortgage held against the property? also, if the bank is not able to satisfy the amount owed against the property, will there be a judgement against me for the difference?

thanks
"Also, If the bank is not able to satisfy the amount owed against the property, will there be a judgement against me for the difference? "

If the first mortgage holder agrees to accept a deed in lieu of foreclosure then he cannot take action to recover any balance dues by way of deficiency judgment.

The other question you have asked is about the second mortgage if dil is accepted by first mortgage company, in such situation the first mortgage company will be taking over the property along with the second mortgage lien over it.

But as far as I have seen a first mortgage holder does not agree to deed in lieu of foreclosure if there is a second mortgage on the property.

Miller
Posted on: 05th Jun, 2007 06:44 pm
junior liens are not wiped off in a deed in lieu of foreclosure and this is the reason lenders do not agree to a dil of foreclosure is there is a second mortgage
Posted on: 05th Jun, 2007 07:11 pm
Hi,

Welcome to Mortgagefit forum.

"When you do a deed in Lieu with the primary mortgage what happens if there is a second mortgage held against the property? "

The primary mortgage company will take title of the house with second mortgage lien on the house still existing over it.

At the time the house will be sold the lien will have to be paid off as any buyer will not accept to take ownership of house which has a pre-existing mortgage lien on it.

Colin
Posted on: 05th Jun, 2007 07:16 pm
Hi Guest,

As far as I know, deed in lieu does not work out well for properties where there is a second mortgage. This is because such loans do remain as junior liens on the property even after the deed-in-lieu. So, the lender actually accepts the property subject to the second mortgage lien. And, not getting a clear title (as there is a junior lien on the property), is one of the reasons why lenders do not prefer to agree to a deed in lieu of foreclosure.

Take Care
Posted on: 05th Jun, 2007 10:16 pm
Hi Guest,

Usually when the first lender accepts a deed-in-lieu, he includes a non-merger clause into the deed-in-lieu agreement. This clause prevents the junior lien holders on the property to take any legal action against the first lender. Generally, the junior lien holder may take the action in case the outstanding balance on the second mortgage isn't paid by the first lender taking over the property.

However, including the non-merger clause does not mean that the first lender does not have to pay the junior liens. He retains the responsibility of repaying the second mortgage until and unless he comes into any negotiation with the second lender. And, if the first lender finds that he is not able to sell the property at a price such that he can retrieve his money and also pay off the second loan, he may cancel the deed-in-lieu and later foreclose the property. This is done in order to cancel any claim made by the junior lien holders.

Hope I could help you.

Regards,
Jessica.
Posted on: 06th Jun, 2007 02:03 am
This really helps a lot. We are in a situation where the market is flooded with foreclosures and our property value has plummeted. We move from this area 2 years ago and have not had any success in the sale of the home in question. We have even tried to sell and absorb up to a $10,000 loss to no avail. Right now the payments are killing us. If you have ideas for another way out, please respond.

Thanks again for ALL of your help
Posted on: 06th Jun, 2007 07:10 am
In this situation you have to buy some more time and hope the market situation improves and then try to sell. You have moved out to some other location, so why not try to find a tenant for this house that could be of some help for you with the payments.
Posted on: 06th Jun, 2007 01:35 pm
Yes, renting the property out was an option we looked into. However, we are several states away now and it would be impossible to keep up with it. If we hire property management, between that cost and the low rental rate for the area now, it would only cover about 1/2 of the payment. Again, we are sinking under the payment. Thanks for your reply
Posted on: 06th Jun, 2007 07:02 pm
Welcome back Just us.

Did you discuss the possibility of deed-in-lieu with your lender?
Posted on: 08th Jun, 2007 05:49 am
I understand that some lenders will not do a deed in lieu of foreclosure when there is a 2nd lien on the property. What if the second lien is with the same lender.
Posted on: 26th Jun, 2007 06:42 am
Hi Theus,

If same lender also holds the 2nd lien then he will check whether the house will get sold for an amount to recover his dues on both the mortgages. If he does not expect the house to get sold for an amount which would help him recover his full balance then he will not agree to a deed in lieu.

Miller
Posted on: 26th Jun, 2007 06:36 pm
"I understand that some lenders will not do a deed in lieu of foreclosure when there is a 2nd lien on the property. What if the second lien is with the same lender."

I'd agree with Miller. Lender would only agree to accept the house through dil if he sees that amount left on both the mortgage combined could be recovered after taking over the house through a deed in lieu.
Posted on: 27th Jun, 2007 05:10 pm
What happens to the 2nd mortgage if the 1st mortgage does not do a deed in lieu and just does a foreclosure?
Posted on: 18th Sep, 2007 04:40 pm
Hi Evelyn,

The lender will have to pay off the outstanding balance of the second mortgage with the money received from the foreclosure sale of the first mortgage. After doing the foreclosure it will be his duty to pay off the second mortgage.
Posted on: 18th Sep, 2007 08:09 pm
That does not happen in a foreclosure on homes with second mortgages.

If it's a deed in lieu accepted by first lender, then it's his liability to pay off the second loan. But inr a foreclosure, if the home sale proceeds do not cover the second loan balance entirely, then the second lender demands it wither from the borrower or attends the home sale and bids such that he gets his money through the sale. or else, the second lender can go for a charge-off and forgive the debt. But he may also issue a judgment against the borrower or garnish his wages through court order.
Posted on: 19th Sep, 2007 05:57 am
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