Second Mortgage Does Not Need "Deficiency Judgment" To Sue Borrower Personally

The risk of  personal liability from a mortgage foreclosure depends on the nature of the mortgages and the lenders. Second mortgage holders are more likely than first mortgage holders to pursue personal liability after a foreclosure. Among second mortgage holders, the risk of personal liability after foreclosure also depends on the nature of the second mortgage loan. Second mortgage loans by large, national lending institutions were most often made to help finance the purchase of the property or to finance an addition or improvement to the property. These second mortgages are typically conforming FNMA mortgages which were sold on the secondary mortgage and ended up as part of a marketable security sold to investors (the so-called toxic mortgages). These second mortgage holders are less likely to sue the borrower after either the first or second mortgage holder forecloses on the property.

Other second mortgages were made to secure personal or business lines of credit extended by local banks. These loans were essentially consumer loans or business loans where the lending bank insisted on security in the form of a junior lien or mortgage on the borrower's real property. These consumer loans are not conforming FNMA loans and are not sold on the secondary market. The notes are held by the issuing bank or other commercial lender, and if you do not pay the loan on time the lender is likely to sue you for the money. In most cases, the lender will not wait for the first mortgage to complete a foreclosure and the lender itself will not foreclose the second mortgage. Instead, the lender will sue you directly on the underlying promissory note. If the lender gets a judgment against you, the judgment is a lien on all of your real estate subject to the superior rights of the first mortgage.

Although these types of commercial lender holds a second mortgage its lawsuit to collect money is not a deficiency judgement because the lender's action does not depend on the value of the property or the results of a foreclosure sale. These second mortgage holders are simply suing to collect an unpaid promissory note.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida