2nd Lien Mortgage

2. lien mortgage

secondary mortgage Second Lien debit relates to credits that are not redeemed until credit on older liabilities is fully redeemed after an outage. Because of the junior pledge on property, if a debtor falls into arrears with a collateralised credit, the senior lien owner can obtain 100% of the amount of the credit from the disposal of the underlying security, while the second lien owner can obtain only a small portion of the amount of the credit on the junior credit.

For example, in a property where a defaulting debtor also has a second mortgage, a creditor can exclude and resell the house, followed by full settlement of the remainder of the first mortgage and allocation of the remainder to the creditor for the second mortgage.

The secondary mortgages have a subordinate right to security which has been mortgaged to collateralise a mortgage. A second lien may obtain income from the disposal of the asset secured by the security of the credit in the event of a compulsory winding-up, but only after payment by the prior creditors. Because of the subordinate use of pledges of securities, secondary pledges are more risky for creditors than first-ranking credits.

Due to the increased exposure, these exposures generally have higher interest charges and stricter approvals than prior-ranking liabilities. Second liens represent the main lender exposure and consist of inadequate security in the case of defaults or insolvency. Second lien creditors usually evaluate many of the same elements as first lien creditors in the claim procedure, to include the borrower's debt-to-income ratio, creditworthiness and historical record.

In general, creditors with a low credit exposure may be eligible for large exposures that may be greater than the value of the underlyings. In order to minimise the risks of less credible debtors, the second lien creditors must also specify the amount of capital exceeding the net amount of prior ranking liabilities.

These calculations usually include variable factors such as the costs of winding up and the downside value of the underlyings. Accordingly, creditors may limit the amount of the second lien to make sure that the accumulated loan amount is well below the value of the security. The pledge of a second lien on property also entails risk for the borrower.

Irrespective of whether this kind of borrowing is used to obtain in-house own funds or to contribute funds to a company's accounts, a creditor may initiate the sale of an asset subject to a pledge in the case of failure of a second lien. If a homeowner defaults on a second mortgage, a lender's liquidation and recovery proceedings can lead to enforcement.

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