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Silent second mortgages are taken out on properties with existing mortgages without the knowledge of the first mortgage holder. They are legal but can be used fraudulently. They are often used to finance down payments and can cause problems if the homeowner defaults on either mortgage.
Silent second mortgages are mortgages that are taken out on properties that already carry mortgages. With this particular approach, the holder of the first mortgage is unaware of the existence of this new second mortgage. While legal in many places around the world, this type of arrangement can easily be used to structure fraudulent real estate deals.
One of the most common reasons for taking out a silent second mortgage has to do with financing the down payment when an individual wishes to purchase a property. For example, the original mortgage lender may require the homeowner to make a payment equal to twenty-five percent of the purchase price in exchange for extending the loan to cover the remaining seventy-five percent. If the homeowner has only ten percent of the required amount, he can take out a second silent mortgage as a means of meeting the terms and conditions of extending the first mortgage. Rather than the original lender being aware of this provision, the second loan is secured without reporting the existence of the loan to the holder of the first mortgage.
Assuming that the homeowner can repay the second silent mortgage in a short period of time, while maintaining the monthly payments to the lender of the first mortgage, the strategy allows the purchase of the property to be carried out without causing any difficulty to anyone of the three parties involved. If the debtor has difficulty paying off one of the two mortgages, this could lead the holder of the first mortgage to become aware of the situation. Depending on the laws in your area, the homeowner could be found guilty of fraud.
The reason why a silent second mortgage is sometimes considered fraudulent is that taking out such a second mortgage without the knowledge and consent of the original lender violates certain provisions of the original mortgage agreement. Furthermore, the existence of an undisclosed second mortgage has a negative impact on the original lender, as it is carrying a greater degree of risk to the loan than previously thought. In the event that the homeowner defaults on one of the mortgages, the chance of losing money on the loan is much higher, as now the two lenders must work together to declare the loans in default and find a way to liquidate the property as part of the recovery. In situations where the value of the property has decreased since the original purchase, both the original mortgage holder and the second mortgage holder may have to settle for less than the amount owed.
Smart Asset.
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