i have a 1st and 2nd mortgage loan on my house.since my interest rate on the 2nd mortgage was high 11.75,i got an equity loan from navy fed...

Question

i have a 1st and 2nd mortgage loan on my house.since my interest rate on the 2nd mortgage was high 11.75%,i got an equity loan from navy federal credit union to make the interest lower 8.5%.Unfortunately my house got foreclosed and 2 months after,it got sold.now my second mortgage wants me to pay them 10% (14K) of what i owed them and they will forgive me for the 90% i owe them.they told me that my loan became an unsecured loan because the house got foreclosed.is it legal?do i have to pay them?Pls help

Answer

I would need a lot of details. Normally, when the first forecloses, the second becomes a "frozen" or "sold out" junior lienholder. The second may then sue the borrower directly on the promissory note, for the full balance of the unpaid debt. The second cannot sue if it was also the holder of the first deed of trust (which you are referring to as a mortgage) or if the second would come within the ambit of the purchase money mortgage protection.

There is also a statute of limitations on an action on the promissory note. To me, their offer seems a bit low, and makes me think they feel they cannot win a lawsuit for the debt. I suggest having a competent real estate attorney familiar with anti-deficiency law review the matter before making the decision to accept their offer.

Answer

You don't have to pay them; this is an offer to compromise a debt. If you don't accept the offer and pay them, however, it's likely they will sue you for 100%, plus costs. Which would you rather face, having to pay 10 cents on the dollar, or defend a suit for the whole amount owed?

As Mr. Roach points out, their low offer may be because their case has some obvious defect. I think, however, the lender more likely simply feels that for the amount owed and the costs and uncertainties of suit, they'd rather get 10% and take a hike.

Yes, everything sounds "legal" and indeed the second deed of trust loan is now an unsecured loan due to the loss of the collateral to the first lender. Just because they are unsecured, however, doesn't mean they can't sue and win, and record an abstract of judgment that will in essence re-establish them as a kind of secured creditor.

In the circumstances, it is probably a good idea to have a discussion with a lawyer before rejecting the offer, assuming you are in any position to pay the 10%. Even if you have already decided to pay the 10%, I'd recommend having a lawyer verify that this is in full settlement of the indebtedness.