Facing foreclosure can be a stressful and complex process for homeowners, particularly for those with more than one mortgage on their home. In New York, defaulted second mortgages are increasingly leading to foreclosure due to an increase in home values which creates more equity for a second mortgage lien holder to pursue. There are a number of options for addressing a second mortgage foreclosure, including Chapter 13 bankruptcy, loan modification, and foreclosure defense. In this blog, we will evaluate each of these options, but first we should consider what exactly a second mortgage is.
What Is a Second Mortgage?
A second mortgage is a loan secured against your home, similar to a primary mortgage. However, as the name suggests, it is secondary to the primary mortgage in terms of priority. The two common types of second mortgages include home equity loans and home equity lines of credit (HELOCs). Homeowners often take out second mortgages to fund home improvements, consolidate debt, or cover large expenses. Financial hardship, combined with rising interest rates, an increase in home ownership related costs and the recent spike in inflation, has led to defaults on these loans. In addition, there are many second mortgages that have been in default for years, and which have been sold to debt buyers who are now seeking to collect upon them.
What Happens to a Defaulted Second Mortgage in a Foreclosure?
In New York, foreclosure is typically a judicial process, meaning it must proceed through the court system. The lender on a defaulted second mortgage initiates a foreclosure lawsuit. A summons and complaint are served upon the homeowner, who then must respond with an answer to avoid a default on the action. The lender will then bring a motion for summary judgment or a motion for a default judgment depending on whether the homeowner responded to the complaint in the case. If the lender prevails on their motion the case is then referred to a referee to calculate damages in the case. Once the referee completes their calculation, the lender will use that to bring a new motion for a judgment of foreclosure and sale. If that motion is approved by the Court, the lender may obtain a sale date for the property.
If the property is sold at auction, the first mortgage is paid off first. Only after it is satisfied will any remaining proceeds go toward paying the second mortgage balance. If the home is “underwater” (the homeowner owes more than the property is worth), the owner of the second mortgage will usually not bring its own foreclosure action. However, the second lender may initiate its own foreclosure if it believes there is enough equity to recover most or all of the outstanding loan balance. The decision by the second lender to foreclose often depends on whether the property has appreciated in value and whether it is likely to recover enough funds through a sale to justify bringing the foreclosure lawsuit.
The Effect of Recent Increases in Home Values
In recent years, New York homeowners have seen significant increases in home values, resulting in more equity in their home. This has created new incentives for second mortgage lenders and debt buyers—who may have acquired defaulted second mortgages after the 2008 mortgage crisis at deep discounts—to now initiate foreclosure proceedings. After the mortgage crisis, when property values decreased significantly across the county, these second liens were often considered worthless. This was especially the case for second mortgages with balances that exceeded the value of the home. As a result, many second mortgages were sold at a discount to debt buyers. Fast forward to today, with the increase in home values over the last number of years, especially since Covid, a real opportunity has been created for lenders or debt buyers to collect on these loans. As a result, there has been a noticeable increase in the number of second mortgage foreclosures in New York.
This increase in second mortgage foreclosure filings raises critical legal questions, especially regarding the statute of limitations (SOL) to collect on a defaulted mortgage loan. In New York, the SOL for bringing a foreclosure action is typically six years from the date of default or acceleration of the loan. It is important to remember, it is not just the original default date at issue, since every month there is a new mortgage payment that is due given that these loans can be 10, 15, 20 or even 30 years long. Each payment required by the loan has its own default date unless the loan is accelerated or matured and the whole balance is due.
For some second mortgages, such as HELOCs or home equity loans with shorter terms, the balances may have already matured, potentially giving creditors an incentive to file suit now before the SOL runs entirely. If a debt buyer has been holding a second mortgage for a number of years, some of the payments owed may be outside of the SOL, but it may still be worth it to collect on the remaining balance due on the loan.
Deficiency Judgments and Collections
If a second mortgage lender does not recover the full amount owed through a foreclosure auction, they may still pursue a deficiency judgment, which is a personal judgment against the borrower for the remaining judgment balance. Once obtained, these judgments can lead to wage garnishments and/or frozen bank accounts.
Options for Homeowners Facing Foreclosure with a Second Mortgage
If you are facing second mortgage foreclosure, there are several strategies to consider:
Chapter 13 Bankruptcy
First, if the debtor is seeking to retain their property, what is often the best option for a homeowner facing a foreclosure lawsuit on a second mortgage is filing for Chapter 13 bankruptcy. Moreover, a successful chapter 13 bankruptcy case will provide the most guaranteed way for a homeowner to keep a house that is in foreclosure. Chapter 13 bankruptcy enables a homeowner to repay their mortgage arrears and address any other debt issues over a 60-month payment plan that is typically interest free. Upon the filing of the petition and plan, the homeowner obtains an automatic stay against all debt collection activity, including a stay against any foreclosure proceedings. It will even stop a scheduled auction date of a home.
Upon the filing of Chapter 13 bankruptcy petition, the homeowner resumes paying their regular monthly mortgage payments as if they were not in default or in foreclosure. Simultaneously, within 30 days of the bankruptcy filing date, the debtor is required to make their scheduled plan payment to the bankruptcy trustee assigned to the case. Once the plan is confirmed by the Court, the bankruptcy trustee begins to pay the claims that have been filed by the creditors in the case. Upon completion of their plan, the debtor’s second mortgage is reinstated, and the foreclosure lawsuit must be withdrawn (although this may happen prior to the completion of the plan in some cases).
Loan Modification
Second, a homeowner may seek to obtain a loan modification with the second mortgage lender. A loan modification brings the homeowner current on the loan and typically places any missed payment into a new modified loan. This enables the homeowner to start paying the loan again, although a trial period is usually required before a final modification is approved.
While this was an attractive solution to a defaulted mortgage in the past, loan modifications are typically being offered using market rates which are a lot higher than rates that were available over the past decade or so. In addition, second mortgages typically will have higher interest rates than first mortgages. This makes accepting a modification much more expensive over the life of the loan. The new payment in a modified mortgage may be a lot higher than the original payment with the arrears added to the loan balance and depending on how far the lender is able to extend the term of the loan in the modification. Furthermore, a loan modification application can be easily denied if it does not satisfy the lender’s guidelines. Considering this and provided it is feasible, it is usually best to resolve a foreclosure or default of a mortgage through Chapter 13 bankruptcy, which enables a homeowner to pay any arrears through a 5-year payment plan.
Foreclosure Defense
Third, the homeowner can fight the foreclosure in state court by asserting their available defenses such as Statute of Limitations, Lack of Standing, Improper Service, or Failure to meet the requirements of RPAPL § 1304 (90 Day Notice Requirement). While this option can often buy the homeowner some time, such cases are often difficult to win and may not resolve in the homeowner’s favor.
It is important to act quickly when fighting a second mortgage foreclosure in state court, since a homeowner must answer the summons and complaint timely to keep themselves out of default. By statute, the deadlines for responding to a foreclosure are 20-days for personal service and 30-days for service by mail. However, a homeowner may receive a new 30-day period in which to answer the complaint if they appear at the initial settlement conference in the case. See CPLR § 3408.
In fighting the foreclosure, the homeowner may be able to create leverage through this process which can create some uncertainty for the lender given that these cases often take some time to litigate in the court system. Considering this, a lender may be willing to settle the foreclosure action by offering a loan modification, even where such an offer was denied in the past. If a loan modification is the end result of a settlement in a foreclosure lawsuit, it may still be beneficial to consider whether Chapter 13 bankruptcy makes more financial sense.
Sale of the Property
Finally, although it may not be an option that a homeowner initially desires, if the above options are not feasible, they should consider whether it makes sense to sell the property. If there is sufficient equity in the home, this can enable the homeowner to preserve their equity, as opposed to potentially losing it in a foreclosure sale. This is especially important to consider when there is significant equity in a home. The sale would pay off both mortgages and hopefully provide the homeowner with a fresh financial start.
Contact the Law Offices of David I. Pankin, P.C.
Speaking with an experienced bankruptcy attorney is a crucial step for a homeowner facing a second mortgage foreclosure. If you are facing a second mortgage foreclosure in New York, it is essential to act without delay. These cases are often time-sensitive and legally complex. The Law Offices of David I. Pankin, P.C. have over 28 years of experience helping New Yorkers navigate mortgage and foreclosure issues. Contact us today for a free consultation at (888) 529-9600 and take the first step toward protecting your home and financial future.
