Really? That would put a lot of lawyers out of work. Of course, it depends what was written in the contract. I have a real problem envisaging a mortgage agreement that did not make provisions for a default. I’m no expert on US property law, or any other, but businesses function in much the same way worldwide.
My take on the whole situation is this: defaulting for a trivial reason, while still being able to pay, will just cause you endless grief. If money is not the real problem, sell the house and move. Rent or buy as you wish, but frankly you would be better off buying if you are around a decade away from retirement.
So your 33K underwater, and you walk away. Here’s what will happen, and no it won’t matter if you just stop the payments or tell the bank to take it back. As a side note I say 33k as the second will be due once the house goes into foreclosure.
First the bank will foreclose on the house, this involves paperwork, then after that the bank will sell the house at auction, and say the bank does get 80K for the house (really they might get much less) leaving at least 33K plus all the expenses. So for easy number say it comes to 40 - 50k, which the bank will sue you for. Now then if you can’t pay that, you’d file for bankruptcy, and that would be under chapter 13 not 7, in which the court would make you pay a trustee to make payments to the bank. A bankruptcy will follow you forever.
You best bet is to stick it out until the market recovers enough to cover the the first and second. It’ll be cheaper in the long run.
This befuddles me. If you were going to walk away from the house and the first mortgage, why would you want to keep up payments on the second mortgage? In for a penny, in for a pound, you know?
To answer your question, though, I am pretty sure that if you have lost the house, the mortgage allows them to demand payment in full, and they won’t just let you keep on making your normal monthly payments as if nothing had changed. (What happens if you don’t then pay them off is a different question, as is the question of whether they would consider some sort of ongoing payment arrangement to satisfy your debt, which would also now include various penalties and additional fees, I would imagine.)
Exactly. The only reason the OP got the interest rate they got on the second mortgage is because it is secured by the house itself. If the OP defaults on the second mortgage, the bank can force a foreclosure sale on the house in order to get their money back.
If the house foreclosed on for any other reason (e.g. failure to pay the primary mortgage, failure to pay city taxes, etc.), they have lost their security. One might think that the holder of the second mortgage might be willing to simply increase the rate to that of an unsecured loan, but it is far more likely that the loan terms only give them the remedy of demanding full payment of the outstanding loan balance immediately – which they will surely do.
Is there “ordering” with these sorts of debts? If the house sells for, say, 50k at auction, does the 2nd mortgage holder get paid off completely and the first one gets only 37k or does the first one get 50k and the 2nd gets nothing or do the proceeds get split?
As for “demanding payment immediately” - blood from a stone. If the OP’s assets are not in a form that can be garnished or seized in the state he is in, it doesn’t matter. Depends on the state - for example, some states have no wage garnishment for debts, most protect retirement accounts, etc.
Out of curiosity, does your job include a government security clearance? If so, walking away is career suicide as it will be revoked as soon as they find out. Financial stability is a big deal for the government.
I’m a lawyer in the U.S., and there is plenty of work. You might have been confused by the term “punitive damages,” which refers to damages awarded in civil cases to punish wrongdoing rather than to make the plaintiff whole. In contract law, money damages are typically limited to compensatory or expectation damages, or in highly simplified terms, “the value of the contract.”
The mortgage agreement does make provision for default; namely, the bank’s right to foreclose, and to collect any additional sums due after foreclosure.
Typically the first mortgage has “first charge” over the assets, which means if the outstanding first charge amount is equal to or greater than the value generated by the sale, they get 100% of this and any other creditors get nothing, they would then have to sue for the balance.
A second mortgage is a “junior lien” to the first mortgage. However, Dead Cat’s explanation generally doesn’t apply in the US, where a second mortgage is extinguished in a foreclosure sale (unless the second mortgagee wasn’t made a party to the foreclosure action*). The second mortgagee can choose to pay off the first mortgage and thus take lien priority, and then foreclose itself. If the second mortgagee is the one initiating the foreclosure, it must pay the first mortgagee off before it can collect.
*If the second mortgagee is not made a party to the foreclosure, its rights are not affected. The foreclosure sale buyer takes the property subject to the second mortgage.