Second mortgagee at risk in foreclosure

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Dear Dr. Don,
We are holding a second mortgage on a house we sold. The new owner is delinquent on both the first and second mortgage after nine months.

What is our recourse so we don’t lose our money? We are 60 and cannot afford to lose this money. We are not big financiers — we only wanted to sell our house last year in what was a terrible market.
— Anne Asks

Dear Anne,
Your loan document spells out what recourse you have with the nonperforming loan. By virtue of holding the second mortgage, you have to consider what will happen if you trigger a foreclosure.

The first mortgagee gets paid first from the foreclosure proceeds. That is what it means to be the first mortgagee on the property. If property values in that market have tanked, you may take a hit, or lose all your money, by triggering the foreclosure.

Many second mortgage holders are reluctant to start the foreclosure process because of that risk. They’d rather wait things out.

You didn’t say what the homeowner paid as a down payment, or what equity he or she has in the property. But if the homeowner doesn’t have a lot of equity in the home, you’re definitely at risk.

Your ability to sue for a deficiency judgment in foreclosure depends on the applicable state laws. A deficiency judgment is a court order authorizing a mortgage lender to collect part of an outstanding debt. It is issued after the court finds the property is worth less than the book value of the outstanding debt. It’s best to consult with a real estate attorney if you’re considering that course of action.

Yes, it’s disconcerting that the borrower is late just nine months into the loan, but despair isn’t the answer. Figure out where you stand and take appropriate action based on that perspective.

I’ll tell you truly that I don’t know what President Obama’s $275 billion housing bailout might mean to you or your borrower, but stay tuned to Bankrate to learn more about the provisions of that plan.