Can the Bank Who Holds the Second Mortgage Foreclose?
If you fail to make your mortgage payments, your lender (mortgagee) can foreclose, or take possession of your home and sell it to recover the money owed. When you have a second mortgage or home equity line of credit (HELOC) on your home, the bank who holds the second mortgage or HELOC can also foreclose if you miss payments. Both first and second mortgages are secured by the value of your home.
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Considerations
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Usually it only pays for the second mortgage lender to initiate foreclosure proceedings if you have substantial equity built up in your property. If your home's appraised value falls below the combined loan balances, the bank who holds the second mortgage is not likely to foreclose. The house is not likely to bring in enough at a foreclosure auction to cover the total amount owed, and the first mortgagee gets paid first, so the second mortgagee would lose money.
Defaulting on Second Mortgage
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If you have only defaulted on the second mortgage or HELOC and your first mortgage is current, the second mortgagee can still foreclose. To do this, the second mortgage lender would need to buy the first mortgagee's interest in the property by paying off what you owe the first lender. Once the second mortgagee initiates foreclosure proceedings, the first mortgagee may decide to come forward and buy out the second lender's interest.
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Defaulting on First Mortgage
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When you are in arrears on your first mortgage and have managed to stay current with your second mortgage, the first mortgage lender will likely buy the second lender's interest in the property. The first mortgagee is then entitled to collect the combined loan balances through foreclosure.
Defaulting on Both
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Providing the appraised value of the property is higher than your loan balances, the first mortgagee does not assume a lot of additional risk by taking control of both mortgages. If both lenders foreclose, the house will be sold at a foreclosure auction. The first mortgagee will be paid first and the second mortgagee will be paid with any remaining funds. It is possible for the lenders to negotiate for one of them to buy out the other's interest, so only one mortgage holder forecloses.
Alternatives
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If you have defaulted on your second mortgage or HELOC and the bank who holds the second mortgage chooses not to foreclose, it does have other options available. The second mortgagee could still win a money judgement against you in court, or you may owe a "deficiency balance," which is an unsecured debt balance, much like credit card debt. The second mortgage holder can also file a lien on the property. If you manage to avoid foreclosure and keep the property, you will eventually have to deal with the second mortgagee if you sell or refinance your home.
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