When it comes to private lending, there are always risks involved for lenders. This is especially true for second lenders.

A first mortgagee has an interest in a property ahead of any subsequent mortgagee’s interest in a property. So, when a borrower has defaulted on both of their mortgages, and the first lender has sought a mortgage remedy, what remains for the second lender?

This article specifically discusses the options that a second lender has when a first lender obtains foreclosure.

When First Lender Obtains Foreclosure

If the first lender seeks a foreclosure, they are not responsible for paying the subsequent mortgagee. The Final Order of Foreclosure would transfer the property title to the first mortgagee, and relieve them of any residual obligations. A first lender obtaining a foreclosure essentially precludes the second lender from having any claim against the property itself.

If the lender on the first mortgage obtains the property, relieving them of residual obligations, the second lender can do one of a few things:

The second lender has a right to defend against the first lender’s foreclosure action. While this claim will almost certainly be meritless, any objection must be addressed by the court, and will therefore at least buy the second lender some time.
The second lender can sue the borrower to collect its money. While the foreclosure process protects the borrower against any further claims from the party that brought the foreclosure action (i.e., the first lender), all other subsequent mortgagees or encumbrances may still pursue the borrower. Because of this, borrowers who face foreclosure from the first lender are likely to file a Request of Sale to obtain at least some of the money owed to subsequent mortgagees. While the sale may not produce the entirety of the money needed to pay a subsequent mortgagee, it can at least offset that cost.
The second lender can also try to convince the first lender to allow the second lender to take control of the remedy process (through either a notice of sale or foreclosure action of their own). The first lender is likely to agree to accept payments from the second lender, if the first mortgage has not yet matured. This option is risky for the second lender, as they will still be obligated to pay out the first lender from the proceeds of their remedy, and may not have enough leftover to cover their own debts. However, the second lender may find that the sale produces a surplus of proceeds, which they can put against their loan.

Generally, since the first lender’s rights take precedence, a second lender seeking a mortgage remedy at the same time as a first lender can be unhelpful. The second lender’s additional action would only be eating into the equity of the property, resulting in a greater loss to the second lender.

For more information or questions, please contact our office.