Would a 2nd lien holder buy out the 1st lien holder and foreclose even if the 1st lien was underwater?

Asked by Interesting Situations, Phoenix, AZ Fri Jan 2, 2009

Came a cross a situation where a home has was purchased with an 80/15, but the current value fo the home is less than even the outstanding balance of the first lien mortgage. Borrower suggested stopping payments on the second since it seems unlikely that the second lien holder would want to increase thier losses by buying out the underwater 1st lien to foreclose. Borrower thinks this might be a way to force some kind of modification involving loss sharing for both the lender and the borrower?

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Dan Harris, , New York
Sat Jan 10, 2009
There are many scenarios that could result from this situation.

I just completed a loan modification with a servicer SPS that held both mortgages on the property. In addition to lowering the rate substantially on the 1st mortgage they took a $3,000 payoff to eliminate an $80,000 2nd, thereby wiping out $77,000 on the 2nd mortgage.

In short sales typically the lender on a 2nd will take a huge haircut on their principal balance. In most cases the 2nd lien holder walks away with only pennies on a dollar, which is better than the alternative of foreclosure that wipes out their interest completely.

I have NEVER seen a 2nd lender on a property that is underwater pay off the 1st mortgage for the privelege of losing their investment in the 2nd lien.

I believe that's called throwing good money after bad.
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Paul Welden, Agent, Scottsdale, AZ
Fri Jan 2, 2009
Yes it is possible, especially if the junior lien holder wants to protect their interest in the property. Although it would be rare, it is possible. When this occurs, it usually happens at the foreclosure auction and not before.

Buyer's Agent REALTOR
Web Reference:  http://CheapPhoenixHomes.com
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