2nd Mortgage- Letter to 1st Mortgage Holder Rule

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Question:

When we take a second mortgage, we send a letter to the first mortgage holder advising them of our second mortgage, asking them to verify the first mortgage balance and to refrain from extending any further credit or to make any further loans to this borrower secured by the same RE. We rarely receive the letters back confirming the balance. First of all, do we protect our lien in any way by sending the letter and keeping a copy showing we sent it? Would it be prudent to track until we receive these back?

Answer:

Answer by Randy Carey: I am not aware of any requirement to notify the first lien holder unless it is required by State law. As far as the clause in the letter: "to refrain from extending any further credit or to make any further loans to this borrower secured by the same RE," if the first deed of trust or other security document contains a future advance clause, you will have to look to State law again to see if the letter notification is effective. I find it hard to believe that a simple letter notification rather than a signed agreement with the original lender would prevent the original lender from making a future loan on the property, but again, this would be a State law issue. You need to be addressing this with local legal counsel.

Answer:

Answer by Dan Persfull: I remember something about this but I can't recall where it came from. I haven't seen the letters used in years.

As I recall the letter was primarily used to notify the first lien holders that had future advance clauses in the mortgage of the subordinate lien. The letter supposedly put the first lien holder on notice that if they made any advance via the future advance clause after the date of the notification that advance would become subordinate to the second lien holder's interests.

I really don't think it held much legality and as I said I haven't seen the letter used in years.

Answer:

Answer by Randy Carey: "The letter supposedly put the first lien holder on notice that if they made any advance via the future advance clause after the date of the notification that advance would become subordinate to the second lien holder's interests."

I have seen at least one lawsuit that says otherwise. I would never make a second if the first had a future advance clause in it unless State law directly addresses this issue.

Answer:

Answer by Dan Persfull: As I said earlier I really don't think it held much legality and I think that is the reason why I haven't seen the letter used in years. Those that still use it say its use gives them a "warm and fuzzy" feeling - until they end up in court with no equity in the property and no legal standing to set aside the future advance.

First published on BankersOnline.com 3/19/12