My home was foreclosed on several years ago. I had two mortgages on the property and the first mortgage lender is the one that foreclosed. I just received a “notice of servicing transfer” on the second mortgage. What is this and can they collect the debt from me?
A “notice of servicing transfer” means the loan has been transferred to another company. And, yes, they can collect the debt from you.
What Happens to Second Mortgages in Foreclosures?
First, let’s address the issue of second mortgages and what happened to the second mortgage when your first-mortgage lender foreclosed. (To learn the ins and outs of the foreclosure process, and foreclosure procedures in your state, visit our Foreclosure Center.)
A second mortgage is a loan you take out using your house as security. As the term suggests, the loan is taken out second, after another mortgage. (Home equity loans and home equity lines of credit are typically second mortgages.)
Foreclosure Eliminates Second-Mortgage Liens
In the first-mortgage foreclosure of your home, your second mortgage was also foreclosed and that creditor lost its security interest in your real estate. (Learn more in Nolo’s article What Happens to Liens and Second Mortgages in Foreclosure?)
Foreclosure Does Not Eliminate the Second Mortgage Debt
While the second-mortgage lien was eliminated, the debt associated with the second mortgage simply became unsecured debt. (The second-mortgage holder is then referred to as a “sold-out junior lienholder.”)
Lawsuits by Sold-Out Junior Lienholders
Since the sold-out junior lienholder no longer has the option to foreclose if you stop making payments (because it’s lien has been eliminated), depending on state law, that lender can sue you sue you personally on the promissory note to recover the money it loaned you.
If the sold-out junior lienholder wins the lawsuit and gets a money judgment against you, generally the creditor may collect this amount by doing such things as garnishing your wages or levying your bank account.
Servicing transfers are very common in the loan industry. When you take out a mortgage, there is a good chance that somewhere down the line the bank will sell or transfer the servicing of your loan to a new servicer. (Loan servicers, among other things, collect and process loan payments on behalf of the owner of the promissory note.)
Servicing transfers occur in several ways. The mortgage loan owner may:
- sell the rights to service the loan separately from the note ownership, or
- sell the loan itself.
The owner of the loan or the servicing rights may also hire a vendor (called a subservicer) to take on the servicing duties, rather than servicing the loan itself.
Notification of a Servicing Transfer
The law requires that a current servicer and new servicer notify you in writing of any assignment, sale, or transfer of the servicing of the loan. (This is probably the notice that you received.)
What Happens After the Servicing Transfer?
In your case, the new servicer will probably begin collection activities. It will most likely make repeated calls and send letters to you to in an attempt to collect the debt. If you don’t pay up, it will likely file a lawsuit.
If you want to avoid a lawsuit, there are several different options that you can pursue, including:
- making the monthly payments
- paying the debt off in full
- ignoring the collection attempts and hoping that the creditor doesn’t follow through with filing a lawsuit (not recommended)
- filing for bankruptcy, or
- negotiating a settlement for an amount less than you actually owe. (To find out more about settling a debt, see Nolo’s articles Dealing With Debt: An Overview of Your Options and Debt Negotiations: Common Mistakes.)