Second mortgages are those mortgages
which are subordinate to another mortgage. In other words,
these are mortgages which are placed on properties that already have
a mortgage on them. In the event of a default leading to a
foreclosure, the first mortgage will take precedence over a second
mortgage. It is possible for the holder of a second mortgage
to foreclose on the property. However, in order to do so, the
holder of the second mortgage will likely be responsible for paying off the
first mortgage on the property. For this reason, second
mortgages are considered to be a riskier asset than a first
mortgage. However, under the right circumstances, second
mortgages can be sold for cash in much the same way that a first
mortgage can be.
Second mortgages on single family homes,
multi-family homes and many commercial properties are considered to
be liquid assets, depending on how the note is structured.
Conversely, second mortgages on businesses and free standing mobile
homes have very little, if any, market for liquidation.
Seconds on condos and land notes may or may not be marketable,
depending on the individual note. Commercial properties such
as apartment complexes are likely to be marketable, whereas other
types of commercial properties may or may not be sellable.
In order for a second mortgage to be a
valuable asset which can be converted to cash, the mortgage must be
structured properly. One of the primary factors involved in
evaluating the value of a second mortgage is the ratio of the first
mortgage to the second mortgage. If the first mortgage is very
high in relation to the second mortgage, the second mortgage is
often termed a "throw-away" mortgage and will not be sellable.
In order for a second mortgage note on a home to be a viable loan,
the first to second ratio should be at least 3 to 1, although 2 to 1
is preferable and will create a more valuable note. On
commercial properties, a ratio of 3 to 1 is likely to be the maximum
acceptable value.
As with first mortgages, the amount of
equity in the property also plays a role in the value of the
note. Ideally, a down-payment of 15% or more of the total
purchase price is mandatory. If the note is less than 12
months old, a down-payment of 20% or more is more in line.
The combined loan to value (CLTV) is the
total of the balance on both the first and second mortgages compared
to the value of the property. For instance, if the property is
valued at $10,000 and has a first mortgage with a balance of $4000
and a second mortgage with a balance of $2000, the CLTV would be 60%
(4000 + 2000/10,000). For most properties, a CTLV of 70 % or
less will make the loan marketable. The lower the CTLV, the
higher the value of the note. (Another way to look at this is
the amount of equity in the property. The equity value is the
opposite of the CTLV. In our example, the equity would be 40%.
The higher the equity in the property, the more valuable the note
will be.)
These are a few of the factors important
in evaluating a second mortgage. As with a first mortgage,
other factors (such as the payor's credit rating and history, the
value of property, and the terms of the note) will affect the value
as well.
Keep in mind that the values listed above
are average values, but are not "set in stone". If a loan is
very strong in one area, it may overshadow a weakness in another
area. If you own a second mortgage which you are interested in
selling, we invite you to
contact us for an evaluation of the note. You may also
call us at (401)-258-7158.
