Foreclosing 2nd Mortgage

Synopsis: When times were good people often took 2nd mortgages or home equity lines of credit (HELOC) to capitalize on the rising value of real estate. Today many find themselves able to make only their mortgage payment, leaving the HELOC or 2nd mortgage unpaid. Can the holder of the 2nd mortgage foreclose under those circumstances? What rights does the homeowner have in such a case?

The Situation

Let’s take a hypothetical situation involving the single family home at 123 Oak Street, My Town, Illinois (the "Property"). The owners of the Property have a mortgage and decide to obtain a HELOC. The HELOC requires monthly payments and states that in the event of default the lender may foreclose or take any other action, and that the homeowners will be responsible for principal, interest and Attorneys’ fees. When the husband loses his job, the homeowners find themselves unable to make both mortgage and HELOC payments, and let the 2nd mortgage payments lapse.

Illinois Law

In Illinois the only way a mortgagee may enforce its interest, other than with the consent of the mortgagor, is to foreclose and proceed to a judicial sale. 735 ILCS 5/15-1106(a), 5/15-1404. Foreclosure actions are heard in courts of equity, which will consider all claims and defenses relating to the situation including defenses under the Illinois Mortgage Foreclosure Act ("Act") as well as general equitable defenses such as bad faith or deception by the lender, premature action by the lender without due notice, etc. Foreclosure complaints must name all necessary parties as well, including parties junior in interest to the foreclosing mortgagee and any unknown owners. In addition, the foreclosure complaint must attach copies of the instruments on which the claim is based. There is an exception to this rule in that the Current Lender need not be named; the reason is because its rights cannot be adversely affected by the action. Heritage Federal Credit Union v. Giampa, 251 Ill. App. 3d 237 (2nd Dist. 1993).

The Upshot

While the holder of a 2nd mortgage or HELOC may foreclose its interest in the Property, in all likelihood it will not do so. The real problem in these cases is that the holder of the 2nd mortgage will be entitled to seek a contract judgment. Genuine foreclosure, however, will most likely never be an issue from a 2nd mortgage or HELOC holder.