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Behind the First: Winning Moves for Second Mortgage Holders

by | Dec 25, 2023


[00:00:00] Jim Sorenson: Hello, listening audience, and welcome to Banking on Credit Unions. I’m Jim Sorenson, your host, and this week we’re going to be discussing second mortgage loans and options for dealing with those loans when they go into default. Joining me today is Steve Orsillo. He’s a partner in the law firm here at Sorenson Van Leeuwen Law Firm, and he heads up our foreclosure area of the law firm. Steve, welcome to the show.

[00:00:25] Steve Orsillo: Thank you, Jim. Always great to be here with you, and talk about what we’re talking about today. So looking forward too.

[00:00:29] Jim Sorenson: Good. So as we get this discussion going, I want to just make sure we’re on the same page. And when we’re referring to 2nd mortgages that we’re all in the in discussing that same thing.

[00:00:44] What we’re talking about here is loans that are in a junior position. So typically these might are going to be either closed in second mortgages or he locks. We’re not discussing obviously a he locked that is in a 1st position. So but, [00:01:00] you know, confusion seems to abound when it comes to the rights and options of lenders as it relates to these second mortgages, junior mortgages.

[00:01:09] You see that a lot, don’t you, with our clients and questions we get asked?

[00:01:12] Steve Orsillo: Yeah. No, I mean, I think, you know, just look at the climate we’re in or the climate we’re coming out of, right? Home values really shot up in what’s one thing the credit unions and financial institutions were pushing. You know, home equity loans, right?

[00:01:25] You got all this equity in your home. Why don’t you go out there and take out a second mortgage, a third mortgage, whatever, you know, and tap into that equity. And then you got money to spend and the credit union or the financial institution makes a loan off of it. But now in some cases, maybe a pretty big loan on the books and maybe they’ve stopped paying for whatever reason is the economy, you know, and inflation and everything, what it is now.

[00:01:44] And so you do see second mortgages crop up and clients get concerned about, you know, Hey what are our options here? There’s maybe a first out there. What are we concerned about? And then you think back 10, 15 years ago, right? The foreclosure crisis, 2008. I mean, [00:02:00] that’s where we see a lot of second mortgages now too, where everyone tapped into the equity back then that got wiped away.

[00:02:05] And then you’re left holding a second mortgage. You know, what are you going to do? And is there anything you can do now? Because a lot of them, right, we’re talking 15, 20, 30 or more years, and so maybe they’re still out there you know, accrediting and maybe able to do something about it. So these are all things that constantly come up.

[00:02:20] It’s you know, what can we do? What do we need to be concerned about? So.

[00:02:24] Jim Sorenson: Yep. Those are all the questions that we get in this area and we’ll dive into those in some more detail, but kind of to get started, let’s ask the obvious question. And this question is a question that I’ve gotten a lot over my career.

[00:02:38] You’ve probably gotten as well. Can a lender foreclose when they hold a defaulted second mortgage loan?

[00:02:45] Steve Orsillo: I mean, of course, as long as they, okay. As long as your second mortgage is or third mortgage, whatever is still enforceable, right? It hasn’t matured out and we haven’t gotten to that point yet or something else weird has happened.

[00:02:56] I don’t know what that would be, but yeah, otherwise, sure, it’s no different than, you know, a [00:03:00] first mortgage, you know, try to enforce that. So, yes, it can be enforced unless you run into some odd issues. So.

[00:03:06] Jim Sorenson: Yeah, and can the lender start foreclosure regardless of the status of the first mortgage?

[00:03:13] Steve Orsillo: Yeah, I mean the status of the first makes no difference in terms of what your legal rights are to pursue it. Obviously there may be some business decisions to make there about whether you want to. But the fact that there’s a first out there does not in any way prevent you from doing your own thing following your own foreclosure seeking to enforce. You know your junior lien, so to speak.

[00:03:32] Jim Sorenson: Yeah, the we get that question a lot. I think people believe that somehow because it’s a second mortgage, it’s dependent upon what happens to the first and it isn’t in regards to the rights of the lender. I mean, everything they do is going to be subject to the lien of the first.

[00:03:50] Steve Orsillo: Yeah. I mean, there’s certainly things to consider, but from a legal standpoint, you could certainly enforce it, you know, as long as it remains your option to make in terms of whether you [00:04:00] want to move forward or not.

[00:04:02] Jim Sorenson: So, is there anything unique about the foreclosure process that differs when you’re foreclosing on a second mortgage or a junior mortgage, as opposed to foreclosing on a first?

[00:04:12] Is there something we’ve got to do different, some different approach?

[00:04:15] Steve Orsillo: The process is the exact same, more or less, as it would be for a first mortgage. You’ve got to wait 120 days if you want to be in the fall, past due 120 days before you can initiate a foreclosure on a second. That’s no different than a first, right?

[00:04:28] There’s limited exceptions. They’re a very common question, but a second mortgage, same as the first in that respect. And then the process proceeds the same, we’re naming parties that are on the loan agreement or that have an interest inferior to the second mortgage, right? If there’s other judgment liens or a third mortgage, fourth mortgage, whatever, right?

[00:04:45] Those are all things will include, and the process proceeds the exact same as it would, if you’re a first mortgage.

[00:04:51] Jim Sorenson: Now, does the first mortgage get named in the foreclosure of the second mortgage?

[00:04:57] Steve Orsillo: No, you do not name the first, [00:05:00] as is the case in any foreclosure action. You can only foreclose out those interests that are junior to yours, so.

[00:05:05] If there’s someone superior, such as the first mortgage, you’re not going to name that first mortgage you’re taking title or the foreclosure, I should say, is going to be subject to the first mortgage. So that’s something you’re gonna have to think about and deal with at some point in the process, but there’s no need to.

[00:05:20] Jim Sorenson: And I think that confuses lenders when they’re in the other position, which is they’re in the 1st position and they find out, hey, the 2nd. Has foreclosed and there’s a foreclosure sale next week. Why didn’t we get notice? We’re the first mortgage holder and it goes to that same issue which is you’re not entitled to notice if it doesn’t impact your lien.

[00:05:43] Steve Orsillo: Yeah, maybe it creates a headache maybe not but it’s certainly not impacting your lien rights. Your first mortgage is as enforceable as it was if it didn’t file so I could understand that. You know, that some get a little worked up, but it’s really. It’s not impacting your lien or your ability to lay the foreclosure, so yeah, there’s no need to be [00:06:00] overly concerned.

[00:06:00] Jim Sorenson: Yeah. And of course, what we were talking about right there is the foreclosure process in Florida and how that works. Florida being a judicial foreclosure state, it, you have this lawsuit and this process and some, I’m licensed in Georgia, we represent clients in Georgia. I just, I want to address this question from the Georgia perspective, which is really the process to foreclose is no different.

[00:06:24] On a second in Georgia than it is on a first. It’s just we don’t have a lawsuit. We just go through the advertising moves a lot quicker. So there’s really no difference either Florida or Georgia when you go to foreclose a second. So I just I want to make that clear for any of the listeners who are dealing with or in Georgia.

[00:06:46] So what about the foreclosure sale? Is there any difference when you actually get to the sale itself when you’re?

[00:06:54] Steve Orsillo: No, it’s no different. Obviously you were keeping in mind, right? There’s a first mortgage out there that this whole [00:07:00] thing is going to be subject to, but the sale process is the same.

[00:07:03] It’s going to be a public auction. A majority of them in Florida these days, they’re held at an online auction at some website. There’s still some, you know, courthouse steps that kind of traditional auction you think about, but the process is the same. Selling to the highest bidder for cash in some cases, it may be the plaintiff using its credit bid, or it could be a third party, and I think, you know, one thing to remember, and this is a common question or concern that comes up from the clients is, what about that first mortgage out there, right?

[00:07:29] Or what about that superior lien? And my response is always, you know, it’s not our concern. Foreclosure sales in Florida, it’s pretty clear the law that it’s buyer beware. And if you go to an in person auction you know, there was one just recently, right? The clerk will usually make that point as well.

[00:07:43] Look, you’re taking subject to any issues that may exist. Buyer beware. You’re not getting your money back if you find out there’s an issue with the property. So, you know, in a best case scenario, right? A third party is going to come in and buy you out and outbid it and take title. Now they’re dealing with the first mortgage.

[00:07:59] [00:08:00] You get your check in the mail and you’re done with it. You don’t have to make any representations, warranties, disclose anything to anybody that, Hey, bidded our sale, but there’s a first mortgage. There’s no need to bring up any of that. Yeah, so the process is the same, but just I think the most important thing for clients in credit unions and financial institutions is understand if they’re in the situation is you don’t have to worry about that first mortgage at the sale, just have your sale like normal and, the chips fall where they fall.

[00:08:25] Jim Sorenson: Yeah, and of course, if the lender does become the buyer at the 1st mortgage, our buyer, if the lender becomes the buyer at the foreclosure sale, they’re going to have to deal with the 1st mortgage then because obviously, if they don’t, the 1st couldn’t. Then foreclosed.

[00:08:41] Steve Orsillo: Foreclosed and you’re not gonna have marketable title, right? Nobody’s gonna buy a piece of property with a superior lien out there for, you know, first mortgages. We’re probably talking about a good chunk of money. So, yeah.

[00:08:51] Jim Sorenson: So, this is where I think we get the most questions. And so, you know, I kind of want to dive in here and spend a [00:09:00] little bit of time. But, you know, what are the options for a credit union where the first has not initiated foreclosure or, you know, there may be early. Maybe they’ve initiated foreclosure, but now the foreclosure is on hold for whatever reason. You know, what options does the holder of the 2nd mortgage have in those situations as they contemplate proceeding forward? So,

[00:09:28] Steve Orsillo: I think you probably got about 5 different options to work through, and this is really coming down to the financial institution, the credit union, making a business decision, weighing its options as to how it wants to move forward.

[00:09:38] But, you know, 1 option may be if there’s a 1st mortgage out there to just pay it off and get it out of the way. So you can become the superior elite, right? And then you don’t have to worry about dealing with this problem down the road. I think there’s concerns or things to think through. If you’re going that route, obviously.

[00:09:54] Your mortgage loan documents, you need to look at those or have your lawyer look at them to see what rights you may have. There may be an option [00:10:00] there to advance money on the loan, pay off that first mortgage, and in turn become additional indebtedness, right? Accruing interest and all that stuff under the loan that you can then in turn force the member to pay, right?

[00:10:11] If the member comes forward after that and tries to reinstate or pay off or whatever, you can then account and make them also pay that money as well. But that’s something to be careful about because you know, not to get too down in the weeds on it, but the loan agreement may indicate that there needs to be something taking place that’s going to impact your lien.

[00:10:29] So if the first is starting its foreclosure or has filed a foreclosure and you want to pay it off, that may be grounds to then say, borrower, you need to resolve this or else we’re going to do it for you. And you’re going to owe us the money. So it can get a little tricky there, but that one is one option to go ahead and pay off the first, you know, kind of be done with that.

[00:10:47] Another option. Could be to purchase the first mortgage. Maybe that’s not the most attractive option, but it’s one out there. Obviously, you have to get the first to agree to sell their loan. There’s no obligation that a credit union finance institution sell its loan, or that a [00:11:00] first mortgage sell its loan, but a potential option where they could sell it to you and take an assignment.

[00:11:04] The concerns there, obviously, we’re servicing a first mortgage that we don’t know much about. Do we really want to put that on our books? And then what if the borrower files bankruptcy? Now we got, you know, issues there because we got a services thing on the bankruptcy. Which may be something, you know, just maybe more work than a headache than it’s worth.

[00:11:20] You know, another option is to just wait out the first mortgage and its foreclosure. If they’re filing foreclosure, you can just sit back and let them go through the process. You know, in Florida, foreclosures take a long time, whether it’s a first or a second. So you may be waiting a little while, no longer than if you foreclose yourself.

[00:11:36] But you can certainly just wait around a bit at their foreclosure sale. If you’re interested in trying to get the property, you know, if the first is only so much amount of money and then you’re owed, Yeah, you can bid an amount more than you know, the plaintiff, the first mortgage in an effort to maybe get the property back and turn around and sell it for a profit or maybe cut your, reduce your losses.

[00:11:55] A couple of different ways you could look at that one there. Yeah. You could [00:12:00] obviously initiate your own foreclosure, right? Which we kind of been talking about. You don’t need to worry about what the first is doing. If they’ve started, not started, doesn’t matter. Just do your own thing. All you got to do is try to beat them to the punch, right?

[00:12:09] We want to get to a foreclosure sale before they do. We want to get this thing sold before they do. Maybe a third party steps in or perhaps you know, you get the property back and then you can turn around and pay off the first once your foreclosure sales over and then be done with it. You own the property, turn around and sell it.

[00:12:25] Or you can decide just, we don’t want the headache and the hassle and the time before closure. So, you know, clients may do that and I think it may be wise to do that if the property is underwater, right? We saw this 10 years ago before, you know, the housing market picked back up, right? A lot of these things were under water.

[00:12:41] The first wasn’t even enough there, enough equity there for the first, so you may just say, we don’t want to deal with the property and just sue them on the note and get, pursue it like an unsecured loan, so to speak, and then get a money judgment. You can turn around and try to collect it through, you know, garnishment, levy, whatever the case may be.

[00:12:57] So that’s about five different options. And those are [00:13:00] things you know, obviously look at your loan documents, but I think these are all options that you can kind of weigh and go through and make a business decision.

[00:13:07] Jim Sorenson: So let’s talk about each of these options in a little bit more detail. I know you touched on a lot here and if someone listening to this podcast isn’t familiar with all these things, it can be a lot and overwhelming. So I want to make sure we kind of expand on that a little bit more. So, option one, when pay off the first. Prior to completing the foreclosure and basically advancing that amount on your first mortgage.

[00:13:31] So, let’s give an example here to give it a little bit of context, the first mortgage, let’s say is 200,000 and the second mortgage is 50,000. So, you’re talking about advancing $200,000. And now a credit union goes from holding a loan that has a balance of 50,000 to holding a loan that has a balance of 250, you know, what are the kind of when is this appropriate?

[00:13:55] What are the things that, they’ve got to kind of think through in that scenario?

[00:13:59] Steve Orsillo: I think you [00:14:00] always want to kind of see, what’s the property worth? What’s the value? Is there enough equity there to make it worth their while to spend all this money? And, you don’t want to put yourself in the first position by.

[00:14:08] Paying off the first if you know, the reality is that you’re going to be stuck, holding a loan now that’s not worth enough to pay off. So that’s obviously a concern. There’s other concerns I think to think about too, in terms of, you know, the longer these things go on, right, with any loan, the more expensive it’s going to get, right?

[00:14:26] We’re going to be paying more in it. The interest is accruing, the legal fees, court costs, and all those things are accruing. So if you pay it off sooner. I would see you could afford those additional fees. But again, I think it goes back to making sure that you’re going to get everything you put into it out of it. If not,

[00:14:40] Jim Sorenson: Yeah, a lot of times, clients will say to me, well if we wait to pay off the first later. You know, they’re going to have their legal fees. They’re going to have their court costs, the interest rate on the first mortgage, whatever it is. Usually, the first mortgage is a lower interest rate than the second, but you still have interest accruing on that.

[00:14:59] You may have late [00:15:00] fees, whatever else. And so the concern is, hey, if we pay it off now, we’re going to, the payoff’s going to be smaller now than it will be. In a year from now or whatever, when it reaches the end of the foreclosure process, but you have obviously, and you touched on this on the other side, you have the bankruptcy concern, which is something that I think people always have to consider.

[00:15:19] I mean, a lot of times when borrowers are in bank, are in a foreclosure, they end up going into bankruptcy. Typically a Chapter 13, we’re talking about consumers here, we’re talking about residential mortgages and consumer borrowers. So, usually we’re talking about Chapter 13. And, Chapter 13 are designed for the borrower to be able to save their home.

[00:15:40] To be able to file bankruptcy, cure the default, and be able to continue on with the mortgage. And, of course, the concern there is that if you go ahead and pay off the first, they file bankruptcy, now you’re no longer carrying a $50,000 mortgage loan in bankruptcy, you’re carrying a [00:16:00] 250, and they may be able to cure the defaults and continue to perform under the mortgage.

[00:16:07] So again, these are obviously things that need to be considered before the credit union just jumps off and advances the 200,000. So you know, what are there any additional considerations in terms of purchasing the first mortgage, instead of just advancing and paying off the first mortgage, there’s the option that you outlined as option two, they could buy the first mortgage loan.

[00:16:32] So in essence, take an assignment of the note mortgage, step into the shoes. Now they don’t just have one loan at 250. They now have. One loan at 200 and one loan at 50. Two loans on their books in two different positions.

[00:16:46] Steve Orsillo: Yeah, I mean I think you still have some of the concerns we talked about with paying off the first, right? What if they file bankruptcy? And now I’ve got to service not only my loan, but I’ve got to service this other loan through the bankruptcy, which in a 13 could be, you know, 60 months, 4 or 5 years. And so,[00:17:00] you know, there’s also the way to look at it. I’m not, you know, having to pay more legal fees and court costs and interest and late fees.

[00:17:07] Corporate advances, all these things, the first mortgage is put out there as well, but I think, you know, kind of having to carry service that loan on your books and then the threat of a bankruptcy, you know, can be, I think, a concern that you should consider.

[00:17:20] Jim Sorenson: The real advantage here, probably, and especially in this position over the other would be in dealing with potential condo association liens.

[00:17:31] Steve Orsillo: Yeah.

[00:17:32] Jim Sorenson: Because the first mortgage has a better position when it comes to condo or HOA fees or liens than a second mortgage. So, that may be one situation where we might steer a client towards this option.

[00:17:49] Steve Orsillo: Yeah, I mean, if you’re obviously, you know, there’s all sorts of condos and HOAs throughout the state of Florida and some are bigger than others, right?

[00:17:55] You may be talking about an elaborate community with golf courses and all these things where you’re paying [00:18:00] a substantial portion every month or every quarter every year to have those amenities and you know, HOAs and condos hold liens on all real properties within that association and their liens generally relate back to before your mortgage and superior, even a first mortgage.

[00:18:13] However. So as you kind of alluded to, right, there’s this safe harbor provision in Florida that a first mortgage holder is only liable for I think it’s 1 percent of the original mortgage or 12 months of assessments, whichever one’s lower there. But if you’re a second mortgage, right, like we’re talking about and you foreclose this thing out with a first mortgage out there you could be jointly and separately liable with the prior owner for all passive assessments.

[00:18:36] So if it’s some fancy condo down in Miami beach with. You know, $20,000 in passive assessments, you’re on the hook for that. So maybe where it’s like we’re talking about, right? Paying off or assuming the first to step into their shoes and avoid having to pay all this money in a condo and HOA due, so yeah, that’s certainly another consideration.

[00:18:55] Jim Sorenson: So what about option three, waiting on the [00:19:00] first to foreclose? I mean, you know, you touched on this, but. Sometimes that may make sense.

[00:19:06] Steve Orsillo: Yeah.

[00:19:06] Jim Sorenson: But the downside obviously is you have no control over how long this process takes.

[00:19:11] Steve Orsillo: No, I mean, obviously it’s, if they haven’t started foreclosure or if they’re paying on the first, it’s certainly not an option. Right? And some clients will kinda look at things and go, I don’t think they’re paying the first, but I’m looking and saying, I don’t really see any sign that they filed. And there’s no telling some of these first mortgages, particularly large servicers.

[00:19:29] You know, there’s a lot of hands in the cookie jar of the left that know what the right’s doing. It takes some time to do stuff, right? And even if they do foreclose and start, that’s going to take time. We see that all the time, right? With delays and, you know, unknown delays. We really can’t force them to move their case along any, you know, as fast as we want them to. And so you’re, and we talked about interest and late fees and attorneys fees, those, you know.

[00:19:50] Daily interest, right? And think about all these things, so that’s you know, you may want to wait it around if it’s a first that’s moving quick and you just don’t want the time and expense and hassle, but I think [00:20:00] there’s considerations there as well on the other side, so.

[00:20:02] Jim Sorenson: Is it generally true, and you know, as a general rule, is it generally true that if you’re dealing with a big lender, the Bank of America, the Wells Fargo’s of the world or one of these big law firms that they just seem to move slower than the smaller vendors.

[00:20:20] Steve Orsillo: You would think they’d maybe move a little faster, that they would have the resources to put in place, you know, a more efficient way to operate. But yeah, they can, a lot of them move very slow. And, you know, the reason behind it, I’m really not sure. But yeah, it is interesting that some of these bigger ones take a little time.

[00:20:36] Jim Sorenson: But we see that often where we scratch our head on. Why is this mortgage still sitting out here? Why is this foreclosure still sitting out here? And we’re, you know, I know there’s been times where I’ve handled foreclosures, you’ve handled foreclosures, where we start the second foreclosure way behind the first, and we still beat the first to the finish line, so to speak.

[00:20:57] Steve Orsillo: Yeah, some of these you look, and you know, I’ve seen activity in the case [00:21:00] for three, four months, and it was a bankruptcy, something’s got to be going on, and there’s no indication on the docket, so yeah, that is. It is very common that something’s bigger wants to move very slow, so it’s obviously something to take into account if you’re thinking about just waiting it out.

[00:21:14] Jim Sorenson: And I think we can guide our clients on that as well. We can say, look, this is a big lender. This is with a big law firm. This one’s not going to move as fast as opposed to another credit union lender with a law firm where they’re known to move pretty quickly. So what about option four, complete the foreclosure of the second mortgage first, and then pay off the first mortgage.

[00:21:40] Steve Orsillo: I mean, I think this is generally, kind of a good option to go down. You weigh everything, this may be one of the better options because, like you’re saying, the first can take a while, and there’s a good chance we can beat them to the punch and get to the foreclosure sale. And what I’ve seen with the ones we’ve handled as of late, not necessarily second to first, is that there’s a lot of equity in property.

[00:21:59] And [00:22:00] there’s a lot more third party bidders stepping in than there were, 5, 10 years ago. And so there’s a chance that someone may step in and take this off your hands. If we can beat the first of the punch, get it to a foreclosure sale, and the third party steps in and you get paid in full and you’re done, that’s the best case scenario in my mind.

[00:22:17] That’s a win right there for the credit union or financial institution. I’m not saying that’s always going to be the case, don’t just think because, hey, if we go ahead and file and get quick, a third party will buy us out and we’ll be done. It’s no guarantees as to what happened in any case, but it does happen.

[00:22:30] So I think it’s when you’re weighing your options, it’s really something to consider. So, yeah.

[00:22:35] Jim Sorenson: And I know that, you know, a lot of times when we look at this with clients, option four is really the way to go. But like I said, along the way, there’s other considerations that have to be taken. And ultimately, the credit union makes this decision.

[00:22:49] It’s their business decision at the end of the day after they take in the legal advice and all the ups and downs of the various options. And then of course, you have option five, which is, you know, we’re [00:23:00] just not going to foreclose. We’re going to sue on the note. You obviously this one makes sense when the property value is not maybe some port of.

[00:23:07] I think we also see this when, you know, maybe it’s a small second mortgage, a small HELOC loan, you know, $5,000 owed on a HELOC and now it’s in default. Do we really want to go through the foreclosure process for $5,000 or do we just want to get a judgment? Generally, getting just a judgment will move obviously a little quicker.

[00:23:24] Steve Orsillo: Yeah, I think strong consideration is what’s that property worth and what sort of condition is it in, you know, potential headaches.

[00:23:32] Jim Sorenson: So that kind of leads me to the next question, which is kind of, you know, what is the due diligence that a lender should do before proceeding with foreclosure on a second mortgage?

[00:23:41] Steve Orsillo: I think you need to take a look at the collateral, right? The property and see what is this worth? I’m not saying you got to go out and get a full blown appraisal, but maybe a broker’s price opinion, maybe a Zillow, a Zestimate, whatever those is out there. Drive by and just take a look at it yourself and see what you think and get an idea.

[00:23:57] Is the property in decent condition? [00:24:00] Do we think it may be worth what we think it’s worth? We certainly want to take those things into consideration. Then, take a look at what the first is of, right? Try to get a rough idea on what they’re of, because that’s going to determine, the property may be worth, we’ve determined the property’s worth so much amount of money, what’s the first worth?

[00:24:15] Because we need to determine how much is going to be left as the second mortgage there for us to claim. So that’s obviously important. The two big things to consider right there is the amounts owed on the first and what’s the condition value. So,

[00:24:26] Jim Sorenson: Yeah, this is you know, really obviously should be done on any foreclosure, but, you know, in a second, it becomes more important because you have a first ahead of you.

[00:24:35] And like, in the example I gave where it’s 200,000, you know, you want some assurance that property value is worth more than 200,000. Otherwise. Going forward with foreclosure or paying off the first doesn’t get you anywhere. And you’re better to go with option five and just sue on the balance owed.

[00:24:52] But you know, right now with property values being high and real estate being stable, you know, the valuation is not as [00:25:00] tricky. I remember back during houses crisis 2009, 2010, where property values were dropping month by month. It felt like it was a moving target. And Zillow wasn’t always reliable. And, of course, you know, a lot of clients didn’t want to spend the money on drive by appraisals.

[00:25:17] But even a drive by appraisal doesn’t get you in the home. You’re basing it upon the outward condition of the home roughly matches the indoor condition.

[00:25:25] Steve Orsillo: Yeah, who knows what’s inside? We’ve seen that many a times, right? You open the door and it’s like, whoa. This isn’t what we thought.

[00:25:31] Jim Sorenson: So, but I do think, you know, going by and seeing the property, especially in florida with the hurricanes, we have the storms we have, you know, you don’t want to find out there’s a blue roof on the blue tarp on the roof after you’ve spent the 200,000 taking a year.

[00:25:47] You want to know that up front. So, you know, going by the property, looking at it whether it’s you doing that yourself, that someone had to credit you in doing that. Or you’re engaging a real estate agent [00:26:00] professional broker. Or you’re engaging, you know, some sort of field of visit company. There’s a lot of different options, but you want some idea.

[00:26:09] What’s, you know, does the house look vacant? Does the house look lived in? Does it look like. The house is in generally being kept up, or is it look like it’s in disrepair. All those things are going to impact how you approach the valuation. So I think,

[00:26:22] Steve Orsillo: You know, where’s it located in the city or the town, right? Is it in kind of an up and coming area? Are we in an area where it may be tough to kind of move real estate? So, you know.

[00:26:29] Jim Sorenson: Yeah, or in an area where a lot of re gentrification is going, I was talking to a client yesterday about property they have in foreclosure. And it’s in a desired area and this is over in Pensacola and it’s in a desired area of Pensacola where there’s a lot of older homes and people are going in and, you know, rehabbing them and selling them, you know, they’re able to flip homes. So, you know, this is in an area where, you know, the property values are high, they’re running high.

[00:26:56] And so, you know, obviously that’s great. If you have that isn’t always the [00:27:00] case. So, I think one final question and we get this as well when it comes to second mortgages is, you know, do the standard loss mitigation options, are they still available for a second mortgage loan? Like they are for first?

[00:27:13] Steve Orsillo: Yeah, I mean, the same options in place for a first you have there for a second. You know, you can do a loan modification, some sort of workout that changes the existing loan terms. You know, the considerations that you would have for a first, I would say are there for the second, you could potentially do it, I don’t know, you could go along with a deed in lieu, obviously, as there’s a first mortgage out there, but like, you know, we talked through the process of paying off the first and stuff, so you have to take those into consideration, and if you want to pay off the first and do all that, then yeah, you could do a deed in lieu, that’s certainly an option.

[00:27:41] And then the borrower, you know, generally always has the right to reinstate, that’s a loan provision, whether you want to take it or not and. So there’s, yeah, I mean, a lot of these same options you see on a first are there for the second as well, so.

[00:27:53] Jim Sorenson: Yeah, the one option that probably is a little bit different and we don’t see a lot, it can happen. We saw some of this during the [00:28:00] housing crisis, but you know, when you’re talking about a short sale, usually the second in a short sale is not getting a very good option. If short sale is an option. Now, we don’t see a lot of short sales now because again, real estate prices are up and values are up.

[00:28:14] But should we return to a time where the market is weak and values are dropping, short sales might come back. You know, back then we would see a lot of short sales where, you know, the second mortgage is taking a pretty big cut. They’re getting something, but they’re not getting a lot. Obviously the first is in a much better position when it comes to a short sale.

[00:28:35] They’re in a better position when it comes to all of these options, a lot of times, but the options still exist. And in the right scenario they’re there. And of course we’ve helped our clients, you know, with all of these things over the years. You know, I think as we close out this discussion what I hope the listeners, you know, get out of this and remember is that this can be a complicated area [00:29:00] and that there are a lot of times is misunderstanding or confusion and so, you know, you really do get should consult with an attorney on this.

[00:29:08] I mean, a foreclosure is an expensive proposition to complete a foreclosure. It takes time. There’s energy involved. And then, of course, the credit union gets the property back. That isn’t the end of it. Now they become the real estate agent, right? They, or they’ve got to hire a real estate agent.

[00:29:24] So you want to make sure you do all your due diligence on the front. Don’t get into it halfway and then decide, you know what, maybe we should have taken a different approach. So we want to make sure we’re educating the, our clients obviously upfront. I know you’re available for questions. I’m available.

[00:29:41] So, you know, certainly if you’re running into these things, feel free to reach out to Steve or myself or one of the other lawyers at our firm. So. Steve, with that, I want to go ahead and close out the show. I want to thank you for joining me today.

[00:29:55] Steve Orsillo: Great topic. So yeah, I enjoyed it.

[00:29:57] Jim Sorenson: Glad to have you on the show. And for you [00:30:00] listeners out there, if you found this helpful, please go ahead and like, and subscribe to the podcast that helps us a lot and encourages us to continue to produce this content. So with that, I’ll say goodbye and hope you’ll join us next time on Banking on Credit Unions.

When a second mortgage goes into default, the options for lenders are complex. Foreclosure? Wait for the first to foreclose? Or just sue on the note? 

On this episode of Banking on Credit Unions, hosts and Attorneys Jim Sorensen and Steve Orsillo dive into the intricacies surrounding defaulted junior lien mortgages. They discuss the pros and cons of various recourse options as well as key due diligence to consider beforehand. You’ll learn where the pitfalls lie and how to carefully evaluate the unique legal issues second mortgage lenders regularly encounter. 

Whether you hold defaulted second mortgages or simply want to glimpse this complicated world, tune in for critical insights and how to avoid missteps.

Other subjects covered on the show:

  • The role and significance of waiting periods before initiating foreclosure on a second mortgage.
  • The impact of market trends and property condition on foreclosure decisions.
  • Loss mitigation options are available for second mortgages, including loan modifications and deeds-in-lieu.
  • Legal responsibilities of lenders during the foreclosure process, regardless of loan position.
  • The importance of bankruptcy filings and their effect on second.


You can check out the full episode and subscribe at

If you want to know more about the SVL Law Team, reach out at

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