DEFINITION of 'Silent Second Mortgage'
A secondary mortgage placed on an asset that is not disclosed to the lender of the original loan. Silent second mortgages are used when a purchaser can't afford the down payment required by the initial mortgage. The mortgage is silent because the original lender is unaware of its presence. In many circumstances, a silent second mortgage is a type of fraud.
BREAKING DOWN 'Silent Second Mortgage'
When the original mortgage lender provides funds, the arrangement requires the borrower to provide a down payment. The fraud occurs when a second mortgage is used to fulfill the obligation of the down payment.
For example, let's say that you wish to purchase a house for $250,000. You have secured a mortgage for $200,000, which requires a down payment of $50,000. However, you can't acquire the necessary funds for the down payment, so you decide to take a silent second mortgage of $40,000. The original lender believes your down payment to be $50,000 when it is actually only $10,000 ($50,000 - $40,000). This increases the original lender's risk because a 4% decrease in the home's value ($10,000 / $250,000) will wipe out your equity, but the original lender believes you are covered up to a 20% decline in prices ($50,000 / $250,000)