Default
happens, hopefully not often, but it is a fact of lending. Upon default,
however, a holder of a second mortgage must find an objective, value-driven
manner in which to evaluate its options. Unfortunately, in many instances second position lienholders opt for one of two extreme
approaches—accepting a nominal amount in exchange for the release of the lien
or demanding an unreasonably high sum for satisfaction of the lien. Both
approaches are harmful for different reasons. Despite such prevalent behavior, with proper management, a defaulting second mortgage can provide a lienholder with a number of
options.
So, You Agreed To Be
Second

Upon default, the relationship between the first and second lienholders undergoes a slight alteration. To understand this shift, it is probably most beneficial to think of a second position lien as converting into an option or right of first refusal upon default. When either mortgage is in default, the second lien holder has to assess whether it wishes to incur the cost of litigation, in the case of the second lien’s default, or satisfaction, in the case of a default on the first mortgage. In the same manner, the money lent for the second lien can similarly be seen as the cost of the option, which bears interest for the lender. Viewing its lien from this property rights perspective will enable the second lien holder to conduct an objective risk-weighted cost-benefit analysis of the second mortgage.
Which Approach
Should Be Taken Upon Default?

Unfortunately,
second lienholders and their authorized agents are not always optimally informed
at the time of default, leading to frequent instances of idiosyncratic behavior. That said, I thought it prudent to
provide my take on how to approach the default of a second
position mortgage. Please feel free to provide your prospective on the matter
below.
No comments:
Post a Comment