Although home prices have declined sharply from their pre-crisis highs, the cost of owning a piece of residential property in the United States remains high. What's more, real estate values appear to be rising after years of stagnation. Of course, this is cold comfort to anyone who lost their home during the housing bust.
If you've lost your home to foreclosure or run the risk of becoming delinquent on your mortgage, you may be worried about what the future might bring. Specifically, you might be worried about the ways in which your predicament could affect your credit score as well as your overall financial health.
If you have a second mortgage on your property, you might be especially worried. After all, you technically have two distinct obligations to two different mortgage lenders. In practice, second mortgages are usually "bundled" into a first mortgage in accordance with the so-called "80/20 framework." Also known as "80/20 mortgages," these instruments are designed to provide home buyers with enough leverage to purchase properties that they normally wouldn't be able to afford. If you're carrying an 80/20 mortgage, your second mortgage lender has effectively made the down payment on your property.
It's important to note that the issuer of a second mortgage is always considered to be the transaction's "junior creditor." In other words, your primary mortgage lender will be first in line to receive compensation in the event that your home is sold in foreclosure. If there's any money left over after the first lender has been satisfied, the second lender will receive it. In most cases, second mortgage lenders receive only a small portion of the original loan. Since many foreclosed properties are sold for significantly less than "market value," these lenders typically shoulder tremendous amounts of risk. As such, the practice of issuing 80/20 mortgages is far less common than it was before the crisis.
However, such mortgages must still be honored. If your home has been sold in foreclosure for less than the value of your first mortgage, your second mortgage lender may have legal recourse against you. Although the laws that govern mortgage lenders' legal rights vary from state to state, it's possible that your lender will sue you for this "deficiency balance." If your lender decides to do this, you could face wage garnishment. In other words, you'll have to forfeit up to 25 percent of your paycheck until the debt has been satisfied. Check with your state's revenue service for more information about deficiency balances.