What is a Silent Second Mortgage?

Silent second mortgages are mortgages that are taken out on properties that already carry mortgages. With this particular approach, the holder of the first mortgage is not aware of the existence of this new second mortgage. While legal in many places around the world, this type of arrangement can easily be utilized to structure fraudulent real estate deals.

One of the more common reasons for taking out a silent second mortgage has to do with financing the down payment when an individual wishes to purchase a property. For example, the original mortgage lender may require that the homeowner make a payment that amounts to twenty-five percent of the purchase price in exchange for extending the loan to cover the remaining seventy-five percent. If the homeowner only has ten percent of that required amount, he or she may take out a silent second mortgage as a means of complying with the terms and conditions related to the extension of the first mortgage. Rather than the original lender knowing about this arrangement, the second loan is secured without reporting the existence of the loan to the holder of the first mortgage.

Assuming that the homeowner can repay the silent second mortgage in a short period of time, while also maintaining the monthly payments to the lender of the first mortgage, the strategy allows the real estate purchase to be made without causing any difficulty for any of the three parties involved. Should the debtor have trouble paying off either of the two mortgages, this could lead to the holder of the first mortgage becoming aware of the situation. Depending on laws that apply in the area, the homeowner could be considered to be guilty of fraud.

The reason that a silent second mortgage is sometimes considered fraudulent is that taking out that second mortgage without the knowledge and consent of the original lender violates certain provisions found in the original mortgage contract. In addition, the existence of an undisclosed second mortgage has a negative impact on the original lender, in that he or she is carrying a greater degree of risk on the loan than was thought. In the event that the homeowner defaults on either of the mortgages, the potential for losing money on the loan is much higher, since now the two lenders must work together to declare the loans in default, and find a way to liquidate the property as part of the recovery. In situations where the value of the property has declined since the original purchase, both the holder of the original mortgage and the holder of the silent second mortgage may have to settle for less than the amount they are owed.