Can a Second Mortgagor Get Paid in a Foreclosure?
When a lender files foreclosure proceedings, any other lenders with mortgages on the property in question risk losing money because of seniority payment rules. Only the primary mortgage holder has a guarantee of receiving payment during a home foreclosure as long as the property sells at auction. This leaves a second mortgage holder and other lenders with limited options for recouping debts.
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Destroying Junior Debts
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A home foreclosure by the lender holding the primary mortgage on the property destroys all other mortgages junior to that agreement. This means a lender holding a second mortgage or home equity loan on the property may not be able to recoup money owed on the loan if the only interest the lender has attaches to the property in question. The lender holding a second mortgage may be able to approach the primary mortgage lender in an attempt to work out a payment arrangement, but this is entirely at the discretion of the lender holding the original mortgage.
Payment at Auction
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When a mortgage lender sells a foreclosed property at auction, each lender with an interest in the property receives payment in descending order of seniority. The primary mortgage lender is able to recoup debt before any other creditor. If the primary lender uses up 100 percent of the proceeds, no other lender with an interest in the property may receive payment. A lender holding a second mortgage on the property may be able to recoup some of the debt owed if the sale price of the foreclosure auction is particularly high and the primary lender did not have a large amount of debt outstanding.
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Redeeming Property Value
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A lender holding a second home mortgage may attempt to buyout the primary mortgage holder to preserve interest in the property. This can allow the second mortgage lender to become the primary lender and pursue the borrower directly through formal foreclosure proceedings. According to Bills.com, a financial advice website, it only makes financial sense for a second mortgage holder to buyout the primary lender in a healthy housing market. Sagging home prices because of a slow housing market make it less likely the mortgage holder will see a profit from foreclosing on the property.
Pursuing the Borrower Directly
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A borrower who personally guarantees a second or subsequent mortgage on a home grants a lender the ability to pursue the homeowner directly in the event of foreclosure. This means a lender holding a second mortgage on the property could sue the borrower in civil court for the amount owed on the loan. If successful, the lender may win a garnishment order for the borrower's wages or the right to seize funds held in the borrower's bank accounts.
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