First mortgages, second mortgages, & foreclosure

Pondering the recent tumult in the real estate market in Southern California, I began to wonder how banks might act under the following scenario...

Example Facts:
1st mortgage $400,000
2nd mortgage $100,000

Current Appraised Value: $395,000

Now let's just say that a buyer kept making the payment on the first as scheduled, while discontinuing a payment on the 2nt mortgage. After 90-120 days, the buyer then contacts the holder of the 2nd mortgage offering to pay maybe $25-40,000 if the note holder would clear the debt of the 2nd.

As I see it, the 2nd (note holder) would benefit best by accepting the offer made by the buyer... here's why.

If the 2nd were to spend the money to foreclose on the owner/occupant, the home would then be sold off for market value of $395,000. The first mortgage holder is entitled to the first $400,000 of the sales profit due to their being in first position. In this scenario, the 2nd mortgage holder would gain nothing from the sale while having spent many thousands additional $$ to foreclose.

If the 2nd takes the offer of the buyer, they gain (dollar for dollar) the benefit equivalent to the offer amount the buyer submits.

Curious to hear if anyone has had experience with the aforementioned.

This is not advisable due to the negative credit reporting that may occur. Additionally, home appreciation is substantial over time and you may find yourself back in black sooner than you think.

Cameron Novak
The Homefinding Center
951-212-7479

Top Rated Agent at http://www.HomeFindingInfo.com