Over the last few years many private investors put their money in second mortgages (promissory notes secured by deeds of trust on real estate) thinking they were a secure way to earn reasonable interest. Many of these investors have been left without any security for repayment after borrowers defaulted on their first mortgages and the properties were sold at foreclosure auctions.
The foreclosing first mortgage lender is usually an institution like a bank. Banks usually hold a simple trustee sale of the property. If the sale does not fully repay the loan the bank just writes off the loss.
It is harder for the second mortgage lender to just write off loss. First, the second lender usually loses everything, not just the difference between the sale price and the loan. Second, many second lenders are individuals and families who have invested their retirement savings. In this case the loss is devastating.
Some of the borrowers that defaulted on their first mortgages were buyers of second and third investment properties. These borrowers still own other property, sometimes with considerable equity. Finding out is not expensive. Public records are indexed by name in each county. There are companies that will handle the search for $50 or less.
If a borrower owns other property a sold-out junior lender can, in some cases, use it to repay the debt. This requires a court action for failure to repay the note. Most notes allow the lender to add their attorney fees to the debt as well as court costs.
If you are a sold-out junior lender holding a promissory note it might be worth considering whether your borrower has the ability to repay through other equity than the property borrowed against.
From Sebastopol, the Law Offices of Graden Tapley represents clients throughout Sonoma County, including Santa Rosa, Cotati, Healdsburg, Petaluma, Rohnert Park, Santa Rosa, and Windsor.