Defaulting on a Second Mortgage in Michigan

Second Mortgages

• Michigan homeowners wanting to make home improvements, pay off credit card debts or finance college costs can take out a second mortgage as a financing option. When compared to a property's first or primary mortgage, a second mortgage exists as a subordinate lien, meaning the primary lender receives payment first in the case of default or foreclosure. As a result, lenders who originate second mortgages take on a larger risk, as there's little guarantee they'll recoup monies owed in the event of default.
  
  

Foreclosure Process

• Within the state of Michigan, foreclosure processes proceed according to title theory law, which places the title of the property in a trust until a borrower pays off the mortgage loan. In the event of default, a nonjudicial foreclosure process allows primary lenders to auction off a property without going through the court system. More often than not, there's little if any money left over to pay toward a second mortgage loan. As a result, second mortgages typically get canceled after the property sale, as the borrower no longer has equity in the property.
  
  

Lender Options

• Defaulting on a second mortgage occurs whenever a homeowner misses a payment or makes a partial payment. Once a homeowner defaults, second mortgage lenders have options as to how to recoup monies owed. In cases where a homeowner has considerable equity in the property, the second mortgage lender may opt to pay off the primary lender and then foreclose on the home. Just like with the primary lender, Michigan laws allow a second mortgage lender to auction off the property without going through the court system. Lenders can also choose to make a settlement offer that requires the borrower to pay a lump-sum amount to pay off the mortgage. Often, the lump-sum amount equals a percentage of the remaining balance rather than the entire balance due. In certain cases, lenders may offer a forbearance plan that allows borrowers to catch up with their payments.
  
  

Anti-Deficiency Laws

• When a primary lender sells off a property at auction, the balance of the mortgage due may exceed the actual sale price of the home. In Michigan, anti-deficiency laws provide borrowers with certain protections in cases where a lender tries to collect any remaining monies owed from the sale of the property. Although anti-deficiency laws apply to primary mortgages, however, they don't apply to second mortgages. This means that a second mortgage lender can ultimately sue the borrower once the property sells at auction. In cases where a second mortgage lender purchases the primary mortgage and then sells the property at auction, anti-deficiency laws apply.