Ask a Lawyer - Archive

My house was recently foreclosed on; it was a rental house and I had a second mortgage on it. What happens to the second mortgage now?

When there are two (or more) mortgages encumbering one property, the first or senior mortgage takes priority over the subsequent mortgages. A valid foreclosure of a senior mortgage terminates all interests in the foreclosed real estate that are junior to the mortgage being foreclosed and whose holders have properly been joined in the foreclosure. For example, when the property is foreclosed upon by the senior mortgagee and a foreclosure sale forces the sale of the property, the proceeds of the sale are first used to satisfy the senior mortgage insofar as possible. Any remaining proceeds, if any, are then used to satisfy the junior mortgages insofar as possible.

When the foreclosure sale takes place, the lien of every mortgage is extinguished. However, if the proceeds of the foreclosure sale are not sufficient to pay off the second mortgage in addition to the first, the mortgagor is not released from the debt obligation that was secured by the second mortgage. The second mortgage lender can instead seek a "deficiency judgment" against the debtor. At the same time, as a practical matter, a deficiency judgment is unlikely to be instituted in most cases due to, among other things, the cost and time involved in pursuing such actions in court and the availability of bankruptcy relief for the debtor as against the unsecured claim of any deficiency judgment creditor.