Second Mortgagee RightsOther mortgage debtor rights
Enforcement of second mortgages: Key considerations when exercising healing and redemption rights
Owners of second mortgage loans face issues that first mortgagors do not have, in particular because they often have to enforce legal healing or repossession rights in order to protect their interest in security. In Colorado, a second mortgag is usually established when a trustee instrument is issued on the land under an escrow agreement, or when an escrow agreement is amicably substituted for a new escrow agreement.
Holders of a pledge that is subordinate to other interests may be obliged to take measures to safeguard their security, particularly if older debts are in arrears. If a second creditor starts enforcement action, the first mortgagor will almost always be in arrears.
Although the credit facility under the first hypothec has been kept up to date and there is no defaulted amount, the defaulted amount of the debtor under the credit facility under the second hypothec and/or the start of enforcement against the land is likely to be a defaulted amount under the first hypothec. There is the issue of whether the first mortgagor will start enforcement.
If the first creditor initiates enforcement action for the second hypothec, what happens? Here, the second mortgagor has three basic choices to protect his interest in the securities: to repay the first credit and to exclude the ownership freely and freely from the first escrow; to pursue his healing rights and to exclude the ownership covered by the first escrow; or to allow the first mortgagor to exclude the ownership and to pursue the rights of repurchase after the sell.
When the second creditor has adequate resources, he may decide to repay the first escrow. When there are not enough resources available, or when the second borrower chooses not to repay the first loan, he must rectify the failure of the first loan in order to maintain his rights to the real estate.
While the second mortgagor may choose to purchase the ownership by enforcement and then remedy the delay under the first escrow, it is not clear whether the legal remedies are still available. Legislation provides for remedies for younger liens and the ownership of the real estate, but only if the ownership purchased a security before the first creditor recorded the notice of election and subsequent claim or the pendency.
Accordingly, second mortgagors are often in the enviable situation of being able to recover a credit loss backed by real estate they do not yet own, with the potential for the funds disbursed to recover to be bound in the event of future borrowers' insolvency. They should, however, be lower than a full repayment, since the amount of the treatment provided by the first mortgagor may not contain expedited credit, but only those otherwise due and payable.
As an alternative, the second mortgagor can safeguard his or her interests in the real estate by making use of his or her legal right of repossession as a Junior Mortgagor after the forced disposal for the first hypothec. For this purpose, the second mortgagor must repay the legal repayment amount, which comprises the forced auction proceeds of at least the total capital stock of the first credit plus the permissible interest and expenses.
Repayment could be even higher if the first creditor is surpassed in a forced auction. In addition to being willing to repay the full amount, the repaying second mortgage creditor must ensure that it submits the necessary letter of intent for repayment in a timely manner and otherwise meets the repayment law requirement.
Repaying second mortgagors must also be willing to engage with other repaying lienors, as well as the mechanic lien, court lien and federally lien owners, whose priorities are not always clear. Considering the inherent complexities and costs associated with being a delinquent lien provider, it is not surprising that second mortgagors often negociate a repayment of the first lien provider or defend their rights to the security interests by enforcing their legal remedies whenever they are available.