What Happens When a 2nd Deed of Trust Forecloses?

Second trust deed holders rarely start foreclosure proceedings.

The current financial crisis is responsible for the large number of foreclosures that are occurring on a daily basis. Most people are living paycheck to paycheck. Unemployment is higher than it has been in a long time. Once someone who is out of work depletes her savings, it is almost impossible for her to stay current with her mortgage payments. Lenders are trying to work with their borrowers, but they have a responsibility to their shareholders. If you have a first and a second deed of trust, the second lien holder will start a foreclosure proceeding if there is equity in the property. In today's declining real estate market, the second lien holder will typically lose money if he starts to foreclose.

Trust Deed Position

Trust deed positions are determined by the time they are recorded by the county recorder. The first loan recorded on a property is a first trust deed ("first"). The second loan recorded is a second trust deed ("second"), etc. When the first is paid in full, a deed of reconveyance is recorded and the second automatically becomes the first. The amount of the loan has no effect on its position. In the future, if an additional loan is taken out it would be a second trust deed, unless the first agreed to subordinate. When the first trust deed holder signs and notarizes a subordination agreement, the county recorder will record the document with the new loan and the new loan would then be in first position. This does not happen often with today's declining property values.

Foreclosure

When a first trust deed holder forecloses on a home, the second trust deed holder loses any equity he had in the property. If the second trust deed holder forecloses, he is obligated to pay any balance remaining on the first. That is why second trust deed holders rarely initiate foreclosures. Since homes in foreclosure typically sell for less than the home's market value, the second lien holder would probably be better off walking away from the lien.

Notification

In most cases, the second trust deed holder is notified when the first starts a foreclosure proceeding. If there is sufficient equity in the home to pay off the first and the second, the second would start foreclosure proceedings and the first would delay the process to allow the second to complete the sale. Then the first would pay the second, and the second lien holder would own the property.

Conclusion

Lenders start foreclosures when you fall behind on your mortgage payments. It does not matter what lien holder starts the foreclosure, the result is the same from the borrower's prospective -- she will usually lose her home. Most of the foreclosures initiated in today's market are a result of medical expenses or unemployment. Borrowers often file for bankruptcy just before a foreclosure is scheduled. This will delay the proceeding but it is only a temporary delay, unless the homeowner can bring the loan current. In most cases, if the borrower has the funds to bring the loan current, she would have done it before the foreclosure proceeding was initiated.