Does a 2nd lien holder have to forgive the loan when the 1st is foreclosed?

Asked by cinnrollins, Dallas, TX Fri Apr 5, 2013

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T.E. & Naima Sumner’s answer
T.E. & Naima…, Agent, Dallas, TX
Sun Apr 7, 2013
There is a difference between forgiving a loan and losing the security interest in the underlying property. The word "mortgage" means to promise, as collateral. A mortgage loan is made with the property backing up loan.

The mortgagee has a lien on the property (a claim). When liens are recorded they take precedence by the order they are recorded: the first lien is recorded first, the second lien second, and so on.

The only exception to this ordering is that government liens override mortgage liens, always. Also, some HOA liens are created by documents that pre-date the mortgage loan, but the CCRs of the HOA usually grant a subordination of their lien(s) to a mortgagee's.

A foreclosure, as mentioned, will wipe out the claim on the property and all subordinate liens. So, a second lien foreclosure wipes out the mechanic's lien for fixing the air conditioner, as well as the lawn guy's and the plumber's. A foreclosure of the first lien, then, wipes out the second mortgagee's claim on the property.

But, if you read your Note carefully, while the collateral is gone, the mortgagee usually retains a personal promise from you to pay him back. If he "forgives" that balance owing, then you have phantom income, which the IRS could tax.

Federal law did create a forgiveness of any tax due in the case where phantom income for a forgiveness of mortgage indebtedness occurred, but that law expired at the end of 2012. I don't know if they renewed that. The second mortgagee (or even the first) could make a 1099 report of other income to the IRS for the balance forgiven and put you on the hook.

Are they required to forgive the balance? No. If you reach agreement with them during a short sale, then they are agreeing to forgive it. They might not pursue you for the balance if the amount is small and you apparently have to way to pay it, but that is not a guarantee. Your attorney can give you better advice of what you're looking at.
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1 vote
Mr. Sumner's explanation correct. Under Texas law, your foreclosure does not get rid of your mortgage debts; you're still on the hook for the difference.
Flag Thu Apr 11, 2013
Don Groff, Agent, Austin, TX
Sat Apr 6, 2013
There are so many different scenarios here it's impossible to say. Sometimes they do and they will and other times they will not. There are different laws both at the state and national levels that effect their ability to come after you for a deficiency balance so you should contact a real estate attorney to find out what your rights and potential liability may be.

Hope this helps.

Don Groff | REALTOR® & Mortgage Broker
Austin Real Estate Pros & 360 Lending Group
o 512.669.5599 | m 512.633.4157 |
websites: |
0 votes
Bruce Lynn, Agent, Coppell, TX
Fri Apr 5, 2013
You may want to check with your attorney as we are not lawyers and cannot give legal advice, but in most cases I believe the debt is not forgiven. There may be no collateral left as typically a 2nd lien would be subordinate to the 1st, but that doesn't mean the loan went away.
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John Juarez, Agent, Fremont, CA
Fri Apr 5, 2013
If the 1st lien holder forecloses the 2nd and other junior lien holders lose their collateral…the house. The debts are not wiped out or forgiven. Depending upon the law in your state, the 2nd lien holder may continue to take appropriate action to collect on the debt.

Check with an attorney for the law in your state and how it applies to your personal circumstances.
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