Second mortgage

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Second mortgages, commonly referred to as junior liens, are loans secured by a property in addition to the primary mortgage.[1][2] Depending on the time at which the second mortgage is originated, the loan can be structured as either a standalone second mortgage or piggyback second mortgage.[3] Whilst a standalone second mortgage is opened subsequent to the primary loan, those with a piggyback loan structure are originated simultaneously with the primary mortgage.[4][5][6] With regard to the method in which funds are withdrawn, second mortgages can be arranged as home equity loans or home equity lines of credit.[7] Home equity loans are granted for the full amount at the time of loan origination in contrast to home equity lines of credit which permit the homeowner access to a predetermined amount which is repaid during the repayment period.[8]

Depending on the type of loan, interest rates charged on the second mortgage may be fixed or varied throughout the loan term.[9] In general, second mortgages are subject to higher interest rates relative to the primary loan as they possess a higher level of risk for the second lien holder.[10][11][12] In the event of foreclosure, in which the borrower defaults on the real estate loan, the property used as collateral to secure the loan is sold to pay debts for both mortgages.[10][13][14] As the second mortgage has a subordinate claim to the sale of assets, the second mortgage lender receives the remaining proceeds after the first mortgage has been paid in full and therefore, may not be completely repaid.[15] In addition to ongoing interest repayments, borrowers incur initial costs associated with the origination, application and evaluation of the loan.[9] The charges related to the processing and underwriting the second mortgage are referred to as the application fee and origination fee respectively. Borrowers are also subject to additional costs which are charged by the lender, appraiser and broker.[16]

When refinancing, if the homeowner wants to refinance the first mortgage and keep the second mortgage, the homeowner has to request a subordination from the second lender to let the new first lender step into the first lien holder position. Due to lender guidelines, it is rare for conventional loans for a property having a third or fourth mortgage. In situations when a property is lost to foreclosure and there is little or no equity, the first lien holder has the option to request a settlement for less with the second lien holder to release the second mortgage from the title. Once the second lien holder releases themselves from the title, they can come after the homeowner in civil court to pursue a judgement. At this point, the only option available to the homeowner is to accept the judgment or file bankruptcy.

  1. ^ "First lien/second lien intercreditor agreement". Business Lawyer. 65 (3): 813(71). 2010.
  2. ^ Burr, Stephen I. (2010). "Practitioner's corner: structuring two important real estate finance transactions". Real Estate Finance. 27: 8.
  3. ^ Gouldey, Bruce; Thies, Clifford (2012). "ASSET BUBBLES AND SUPPLY FAILURES: WHERE ARE THE QUALIFIED SELLERS?". Cato Journal. 32: 513–538.
  4. ^ Cite error: The named reference :0 was invoked but never defined (see the help page).
  5. ^ Cite error: The named reference :1 was invoked but never defined (see the help page).
  6. ^ Postel-Vinay, Natacha (2017). "Debt dilution in 1920s America: lighting the fuse of a mortgage crisis: DEBT DILUTION IN 1920S AMERICA". The Economic History Review. 70 (2): 559–585. doi:10.1111/ehr.12342. S2CID 154648457.
  7. ^ Smith, Dwight C. III (2007). "Basel II and IA: an update: an overview of capital proposals over the past year.(Law overview)". Bank Accounting & Finance. 20: 15.
  8. ^ Cite error: The named reference :5 was invoked but never defined (see the help page).
  9. ^ a b Cite error: The named reference :4 was invoked but never defined (see the help page).
  10. ^ a b Hulse, Brian D. (2009). "THE LENDER WITH TWO MORTGAGES ON THE SAME PROPERTY: RISKS AND STRATEGIES". Real Property, Trust and Estate Law Journal. 44: 495.
  11. ^ LaCour-Little, Michael (2004). "Equity Dilution: An Alternative Perspective on Mortgage Default". Real Estate Economics. 32 (3): 359–384. doi:10.1111/j.1080-8620.2004.00095.x. ISSN 1080-8620.
  12. ^ Kosis, William A. (2006). "Staying Ahead of the Curve with Second-lien Loans". The RMA Journal. 88: 34–35.
  13. ^ Gessel, Doug (2009). "Purchase and Sale of Distressed Real Estate-Secured Loans". Real Estate Finance. 25: 16–22.
  14. ^ Tucker, Stefan F.; Lencz, Norman; Masterson, Brian S. (2012). "Real Estate & Passthrough Planning Corner: tax treatment of mezzanine debt discharged following foreclosure on senior loan". Journal of Passthrough Entities. 15: 27.
  15. ^ Klamrzynski, Gregory A.; Grieb, Cari A. (2015). "Fundamentals of middle-market acquisition financing". The Banking Law Journal. 132: 92.
  16. ^ Jackson, Howard (2005). "Evaluating Real Estate Asset Performance". Real Estate Finance. 22: 11–18.