Question:

Why a silent second lien is dangerous for lenders?

Answer:

Even though a silent second lien can be used with success in certain government sponsored programs, most often the usage of a silent second mortgage is fraudulent.

In some cases, a first lender provides 80% financing, the buyer contributes 5% and the seller takes a second mortgage of 15%. The seller is exposed to risk since the silent second lien is not in the open and other liens can be taken against the property. The buyer may never pay back the silent second lien to the seller. At the same time, the first lender thinks that the buyer has 20% equity, which he doesn't, and the first lender carries certain risk unprotected by PMI.

In yet another case, the first buyer may be talked into providing 100% of the loan amount, but the house value is inflated and the first lender made to think they are supplying only 80% of the loan.

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