Real Estate Council of Alberta Fundamentals Practice Exam

What is a secret second mortgage?

1. A second mortgage disclosed to lenders

2. A second mortgage kept secret from primary lenders

3. A second mortgage that consolidates debt

4. A second mortgage with government backing

The correct answer is: A second mortgage kept secret from primary lenders

A secret second mortgage refers to a second loan taken out on a property that is not disclosed to the primary mortgage lender. This type of mortgage is often done without the knowledge of the primary lender, potentially putting the borrower at risk of legal issues, including foreclosure, if the primary lender discovers the undisclosed debt. Choosing this option highlights the critical issue of transparency in lending practices. Lenders typically require disclosure of any encumbrances on a property because they assess risk based on the total amount of debt secured against the property. If a borrower has a second mortgage that they have not revealed, it can affect the lender's decision regarding the borrower's creditworthiness and the overall risk associated with the loan. In contrast, the other options pertain to scenarios or characteristics that do not accurately define a 'secret second mortgage,' focusing instead on situations involving disclosure, consolidation, or government involvement, which are not relevant to what makes a second mortgage 'secret.'