Second Mortgage Foreclosure

mortgage 4

4 minute read

  • Your second mortgage holder can foreclose on your home for non-payment.
  • Your second mortgage holder may choose not to foreclose for economic reasons.
  • Consider the possible tax implications for any debt you have forgiven.

It is possible legally, although not practical economically, for a second mortgagee to foreclose.

If you have a second mortgage which you are not able to pay, you can face foreclosure, whether or not you are paying your first mortgage in full and on time. While your second mortgage holder is in a weaker position, when it comes to collecting from the proceeds of a foreclosure sale, it does not mean that your second mortgage lender will accept non-payment without taking action. Just as with your first mortgage, you need to be concerned with the issues of recourse and non-recourse loans and a deficiency balance, when it comes to considering what kind of obligations you may have after a foreclosure.

The likelihood that your second mortgage holder will initiate a foreclosure depends on your property values and your lender’s ability to collect on a deficiency balance.

Property Values

Given today’s real estate market, where property values have dropped significantly in many areas, many homeowners are upside-down on their mortgages. If you are in a negative equity position, it may be possible legally, although not practical economically, for your second mortgage holder to foreclose and preserve its interests in the property. The first mortgage holder receives any money from a foreclosure before the second mortgage holder. If there is not enough equity in the home to pay off the first mortgage, the second mortgage holder gets nothing in the foreclosure sale.

When a second mortgage holder initiates the foreclosure process, it is responsible for paying off the first mortgage holder’s balance due. If the sale price of the property would not be enough to pay off the first mortgage balance and any property taxes, then the second mortgage holder would gain no economic benefit from foreclosing.

Deficiency Balance Collectibility

The ability of the second mortgage holder to collect on a deficiency balance depends on the legal remedies available and your financial position. In some states, such as California, and in some circumstances, your second mortgage may be a non-recourse loan. A non-recourse loan means that the lender has no legal ability to collect any deficiency balance that remains after your property is sold. Its only recourse is the security on the property itself. Most second loans are recourse loans, even in non-recourse states, although it may be a non-recourse loan if you took out the second mortgage and used the funds to purchase your home. If your loan is a non-recourse loan, the second mortgage holder will have no ability to collect on deficiency balance, which reduces the likelihood of the second mortgage holder foreclosing. You will need to review your loan documents and state laws to determine if your second mortgage is a non-recourse loan. Contact an attorney in your state who is experienced in property law to determine if your second mortgage is a recourse or non-recourse loan.

Your financial position is also important. As we discussed, a second mortgage holder is often reluctant to pursue foreclosure. However, if you have valuable assets or wages that can be garnished, your second mortgage holder will be likelier to aggressively pursue you, if it has the legal ability to do so. The more collectible the deficiency balance is, the greater the chance that your second mortgage holder will foreclose on you.

Quick Tip

Each state legislature created unique foreclosure and anti-deficiency laws. Follow the links just mentioned to learn the foreclosure rules relevant to you.

Possible Payment Solutions

Second mortgage holders often initially take a hard-line stance in negotiations with homeowners in default. You may find it best to liquidate an asset voluntarily, as opposed to facing a wage levy that could cause you great financial havoc.

However, if the lender is convinced that you have no ability to repay the second mortgage and are considering bankruptcy, the lender’s position will soften and consider a lump-sum settlement. Some second mortgagees will settle for 10 to 30 cents on the dollar, depending on the policies of the company.

If collection efforts ensue, negotiate with the creditor in an attempt to reach an out-of-court settlement on the debt. If necessary, enroll the debt in a debt negotiation program. You can to the debt relief savings center for a no-cost quote. Another option is to negotiate the debt yourself.

Quick Tip

Debt distressing you? The Debt Coach is a no-cost online tool that will analyze your debts and show you the options available to resolve them and the costs and benefits of each.


If you end up with a deficiency balance, make sure that you understand what kind of financial and tax responsibilities can follow you, even after you lose or sell your home. If your lender decides to write off the debt, that can create a tax debt for you. Speak with an attorney or a tax specialist, so an expert can explain things to you. The last thing you want is for a problem that you thought was behind you to rear its head with IRS collection notices or a wage levy from a judgment your creditor obtained.

Related Articles

Recent Oldest
1500 characters remaining
  • F
    Frank W,
    Sep, 2020

    2nd Mortgage company foreclosed on property that was upside down, and refused to negotiate with a payment plan. 1st Mortgage current. We were evicted from the property after foreclosure on May 2019. Issue: 2nd Mortgage company has not payed off first mortgage and are renting out the property and using my credit to pay the first mortgage. Is this legal? Aren’t they suppose to pay off the first after auction? Are they suppose to assume the loan and get my name off the first mortgage? Any help appreciated,. Home in California.

    • 35x35
      Sep, 2020

      Frank, you need to speak with a Real Estate attorney. It is my understanding that the second mortgage holder would have to pay off the first mortgage to foreclose on the property. 

    • D
      Donovan D,
      Oct, 2020

      I am in the identical situation in California. Did you discover additional information in regards to your situation?

  • C
    Christina Simmo...,
    Feb, 2020

    I had taken out a second mortgage in 2005. The bank I took it out with went out of business. it appeared that the loan was bought and sold several times. I never paid on the second once the lender went out of business. A company I had never heard from bought the loan and decided for start the foreclosure process. I never received a letter from this company and did not know that my home was in trouble. I received a phone call from a friend who told me my home was foreclosed on. I went to the county recorder and brought up the paperwork. The company had checked a piece of paper that stated they did not need to let me or the first know about the sale of the property because there was no first associated with the property. I was contacted by the sellers lawyer (the first time I had heard from this company) telling me to leave the property. I lost the house in 2015 and the first still has not been paid off by this company. When the first threatens to foreclose on the new owners they pay. I am being hurt by my credit score because the second will not give the first mortgage their due amount. Who do I talk to for help is there any help. Thank you for any input.

    • 35x35
      Feb, 2020

      I wish I could offer a Time Machine, Christina. I would urge you to seek legal help before the foreclosure went through.  Speaking with a lawyer is still the best choice, but I am not sure if it is too late to do anything to help you.

  • E
    Dec, 2019

    My second mortgage was forclosed but my first is in good standing. I want to sell my home in a short sale to pay off the first mortgage. And the second to the third party buyer of the second. Is this possible?

    • 35x35
      Dec, 2019

      I am not a lawyer, so what I share is not to be considered legal advice. 

      Not sure how you would accomplish this. Why would a third party buy a seoncd mortgage in this situation? Are you able to get the first mortgage holder to agree to a price that is less than the current value of the property? If so, why wouldn't they take the property in a forelcosure? If not, then there is no equity in the property and buying a second mortgage would be senseless.

      Would you please clarify the facts, if i misinterpreted them?


  • MK
    Mark ,
    Nov, 2014

    On my residence, I have 1st and 2nd mortgage, both discharged in chapter 7 bankruptcy in 2013. The 1st mortgage ($120,000) with BOA is current. The 1st mortgage has been modified in-house at 4% for 30 years. The 2nd mortgage ($200,000) is with Nationstar (Bank of NY investor) has not received a payment in 5 years. Bank of NY has not been willing to modify. The property values range from tax purpose $222,000, Fair market value high of $250k, low of $205k and foreclosure $170K. I would like to buy the second lien for no more than market value. What do you suggest?

    • 35x35
      Nov, 2014

      Assuming the bankruptcy court discharged your personal liability for both home loans in 2013, you have no legal obligation to pay your first or second mortgages. However, the lenders still have legal claims to your property because a chapter 7 discharge does not affect the lenders' claims to the property. (The rules for a chapter 13 are different, and in some cases the second's rights to the property can be stripped.)

      I raise the rights issue because this will almost certainly impact your negotiations. 

      If I understand you correctly, your property is worth $210,000 plus or minus $40,000 and is subject to a current first mortgage of $120,000. The balance on your second is $200,000, and you want to negotiate a settlement for "market value" which I assume is your property's value minus the balance of the first. According to my math, that's $90,000.

      At the height of the mortgage foreclosure crisis, lenders in the second position were (and still are) taking a bath. Many second lenders would have jumped out of their shoes to settle for 45 cents on the dollar, which is what I think you're proposing. Most got nothing, or if they were lucky, got 5 to 10 cents on the dollar. In light of recent history, what I think you're proposing is a terrific deal.

      Your lever is the bankruptcy discharge. You can walk away from the property with no personal liability. If you walk away and, as you suggest, the property sells for $170,000, the second will see less than $50,000 after the costs of the foreclosure. Anything you offer above $50,000 is gravy for the second.

      The second's lever is foreclosure. If you don't pay, it can foreclose, which will make your life miserable if you like the property and don't want to move. If you want to stay in your home, you have an incentive to reach a settlement to avoid foreclosure.

      Our suggestion? You mentioned the second is not willing to modify. You don't know how willing it is to settle the debt. If you can scrape together a lump-sum, then you risk nothing by offering to settle the mortgage. Explain the numbers from your perspective, and say you're willing to allow a foreclosure if the lender is unwilling to negotiate in good faith. If the second stonewalls you, then consider hiring a lawyer to negotiate on your behalf. Lenders, in some cases, will pay more attention to offers from homeowners represented by a lawyer.

  • BJ
    Los Angeles, CA,
    Feb, 2014
    Have a 2nd property, I/O Mortgage, in NV. I'm a CA resident. Anticipating not being able to afford payments after the 10 yr mark, when loan adjusts and i'm no longer able to pay interest only. Ten years in, and no equity in property because it's severely worth less than purchase amt. Don't think Refi/Mod are plausible options. Don't want to declare BK, still have a job and a first on a property in CA, where my residence is. Best viable options?
    • BA
      Feb, 2014
      Start looking into a short sale or deed in lieu of foreclosure to rid yourself of your underwater property. Open a discussion with the mortgage servicer now about these two options. Also, look for a Nevada lawyer who has mortgage experience to help you with this process.