Senior mortgages are any type of mortgage agreements that have a greater claim on the borrower’s assets than any other existing mortgage. Sometimes known as a primary mortgage or first mortgage, a debtor would need to take steps to satisfy the outstanding balance of this mortgage before addressing any balances related to a second mortgage. In the event of a bankruptcy, the court would manage this process, giving the senior debt priority in the settlement process.
In most countries, the first mortgage taken out on any personal or commercial real estate is automatically designated at the senior mortgage. Depending on governmental regulations that apply, a debtor may have to obtain permission from the holder of this first mortgage before seeking to use the property to finance a second or third mortgage. The granting of this permission often depends on how well the debtor has managed payments on the senior mortgage up to that point, as well as the current level of income enjoyed by the borrower.
As long as payments are made in a timely manner on the senior mortgage and any secondary mortgages, the debtor continues to improve his or her credit rating, and builds equity in the property. Should changes in financial circumstances make it impossible to continue making payments, many lenders will attempt to work with the debtor to arrange alternative payment schedules. This is particularly true in situations where the reason for the reduction in income is temporary, and the debtor can reasonably be expected to resume making regular payments within a specific time frame.
In situations where the borrower experiences permanent change in income, and chooses to file for bankruptcy, the court will evaluate all debts included in the bankruptcy action, including any mortgages that may exist on property owned by the debtor. As the court structures the settlement process, the lender who holds the senior mortgage will be granted the primary claim on any assets of the debtor that are liquidated in order to settle all or part of the total debts included in the action. In the event that the sale of assets will not yield enough to settle all debts, the lender holding the senior or primary mortgage will receive a settlement that is proportionately larger than any lenders holding secondary mortgages.
Holding a senior mortgage does not automatically ensure that the lender will recoup the full investment in situations where a debtor undergoes a financial reversal. The designation of the mortgage as senior rather than secondary debt does mean that the potential for receiving a larger percentage of the amount owed is increased significantly. Many lenders keep this fact in mind when evaluating mortgage applications, and consider not only the ability of the debtor to repay the mortgage in full, but also what amount could reasonably be recouped in the event of a default.
