Beware of Silent Seconds

By Sheryl Landrum
Mortgage Credit Problems Columnist

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Silent mortgage seconds are risky for lenders and for borrowers who get them. Find out why these unscrupulous mortgages can easily contribute to a higher home foreclosure risk.

Silent seconds are called "silent" as they are generally not fully disclosed to the lender on the first mortgage. This scenario occurs when the borrower does not have the required down payment money and the seller agrees to accept a "silent" mortgage for some or all of the down payment. The danger to the lender is that the borrower has none of his or her own money into the home; if the market suffers a downturn, borrowers with no equity are much more likely to allow their home to go into foreclosure. There is danger also to the holder of the second.  Until the loan closes and the seller can record the second as a lien on the property, he has an unsecured loan. Again, should the borrower walk away from the home through mortgage foreclosure proceedings, the seller is likely to lose money.

A second problem with silent seconds is inflation of the home sale's price to cover the down payment. For example, if a borrower needs 10% down on a $400,000 house purchase, the seller could agree to write the contract for $444,444 ($400,000 is 90% of $444,444) with the seller assuming a $44,444 2nd. The lender is aware of the second; however, the "silence" comes into play as the lender is not aware that after the loan closes the seller will forgive the buyer's 2nd. The lender has indeed funded 100% of the home sales price and not the 90% they believed it to be.

While there are more and more safeguards (such as requiring a review of appraisals before loan approval) to prevent mortgage fraud such as these silent seconds, lenders can still be deceived. What borrowers need to remember is not only are these seconds fraudulent, they will also increase the risk of mortgage foreclosure. Prevent foreclosure risk by maintaining integrity in your next home loan transaction.

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