Any one or more of these interests may justify a 2nd’s involvement by its own foreclosure or by being involved in the 1st’s foreclosure.

Each one of these “interests” or “rights” have as its purpose to protect substantial
equity in the property. What is substantial equity is not an absolute. It involves value
judgments by the mortgagee. The article on “How to Bid at a Foreclosure Sale” explains how substantial equity is determined.

Part 1: 2nd’s Involvement By Its Own Foreclosure When the 2nd Does Not Also Hold the 1st and the 1st is Not Foreclosing

This Part assumes that the 2nd Mortgagee does not also hold the 1st Mortgage. A 2nd generally should only foreclose itself when the 1st is not foreclosing and when there is substantial equity above the 1st(First interest or right above). If there is no or nominal equity above the 1st, the 2nd should wait until the 1st forecloses (See Parts 2 and 3 below).

When the 2nd forecloses and the 1st is not foreclosing, the 2nd may wish to cure any present delinquencies and any future delinquencies to the 1st and not pay-off the 1st during the 2nd’s foreclosure until the 2nd re-sells the property. Of course, the 2nd can pay-off the 1st and have the 1st assigned to it. Nonetheless, to pay-off the 1st is much more expensive than to cure it. Curing the delinquencies and continuing to cure the delinquencies on the 1st during the 2nd’s foreclosure will be much less expensive. Most 2nd’s mortgages permit these expenditures to be added to the 2nd’s mortgage. Even if not so provided, most judges would allow it.

Such a cure sometimes presents a problem: the 1st will not accept the cure of
present delinquencies by the 2nd and will not accept ongoing cures from the 2nd during
the 2nd’s foreclosure. If the foreclosure is judicial, the solution is to ask the judge to
order the 1st to accept such cures. When the foreclosure is non-judicial there is no judge
to order such a cure. The solution is to stop the non-judicial foreclosure and start a judicial foreclosure. It is highly probable that a judge will so order in all states, but especially, in states that statutorily allow 2nd’s to cure.( See ii in Preface). Such a judicial foreclosure would be conducted as in Part 3 below, but structured differently. If the judge will not order such cures, the 2nd must buy or payoff the 1st and foreclose itself (i.e. the 2nd as the holder of the 1st and 2nd).

When such a cure is accepted by the 1st or such an order is obtained, the 2nd cures all present delinquencies and, monthly, must cure future delinquencies by contact with the 1st. Of course, the debtor can cure his delinquencies by paying the appropriate amounts to the 1st and 2nd (i.e. including the amounts the 2nd has paid to the 1st). The debtor’s cure of all delinquencies stops the 1st’s and 2nd’s foreclosures. If the debtor does not cure or redeem the 2nd, the 2nd continues its non-judicial or judicial foreclosure through foreclosure sale, subject to other inferior lienholders rights to redeem, if any, (See Part 2 below) and through re-sale. At re-sale, the new owner either assumes or refinances the 1st and pays the balance of his purchase price to the 2nd.

If the 1st commences foreclosure during, but after the 2nd has commenced foreclosure, the 2nd should follow Part 2 or Part 3 below, whichever is applicable.

Part 2: 2nd’s Involvement When 2nd Does Not Also Hold the 1st and the 1st Is Foreclosing Non-Judicially

This Part assumes that the 2nd Mortgagee does not also hold the 1st Mortgage.
When the 2nd forecloses or wishes to foreclose when the 1st is foreclosing non-judicially, normally it is best for the 2nd not to foreclose (See exception below) but to overbid at the 1st’s foreclosure sale or redeem the 1st’s foreclosure sale (Third interest or right above). If the 2nd wishes to cure, see Part 1 above.

If the state in which the non-judicial sale is to be held does not permit the 2nd to redeem the successful bid for a time after at the 1st’s foreclosure sale (See (iv)(a) in Preface), the 2nd must overbid at the 1st’s foreclosure sale in cash (on how to bid, see article on same). In other words, the 2nd must pay its entire bid (if successful) to the auctioneer. That money will be disbursed to pay the 1st first and then to the 2nd (The “circular effect” also See Article on Excess Funds). This applies whether the 1st or a third party is the successful bidder.

If the state in which the non-judicial sale is to be held permits the 2nd to redeem the successful bid for a time after the 1st’s foreclosure sale ( CO, KS, MN, WY), it is best for the 2nd to let the 1st go to its foreclosure sale and then redeem in cash by paying the successful bid (plus interest, etc.). The 2nd then gets a deed to the property free and clear of all inferior liens to the 1st, subject only to the other inferior lienholders rights to redeem. If such an inferior lienholder redeems, it must pay to the 2nd its debt in full, plus what the 2nd paid to redeem. These redemption laws can be tricky. 2nd’s should entrust redemption to their attorneys long before the 1st’s sale to avoid legal pitfalls.

In both of these instances, what must be verified by legal counsel is that the 1st has properly done its foreclosure. If legal counsel finds a defect, legal counsel will advise how the defect can be remedied.

It must be noted that in a non-judicial foreclosure, even if a third party is the successful bidder at the 1st’s foreclosure sale, for more than what is owed the 1st, those excess funds will generally be paid to the 2nd by some form of interpleader action of which the 2nd will be notified. Again, to protect this right, counsel should be involved well before the sale to avoid legal pitfalls.

The problem with the above is that the 1st may stop its foreclosure. In a non-judicial foreclosure, this knowledge is obtained by monitoring the 1st’s foreclosure. This may create an exception to the above, specifically: the 2nd may wish to file its own judicial or non-judicial foreclosure to allow it to foreclose if the 1st stops its non-judicial foreclosure (See Part 1 above).

Part 3: 2nd’s Involvement When 2nd Does Not Also Hold the 1st and the 1st Is Foreclosing Judicially

This Part assumes that the 2nd Mortgagee does not also hold the 1st Mortgage.
When the 2nd forecloses or wishes to foreclose when the 1st is foreclosing judicially, the 2nd should file an Answer admitting the 1st’s priority, counterclaiming for the right to cure and cross claiming to foreclose its 2nd. By doing so, the 2nd protects its rights described in the Preface above.

The first of those rights is to obtain the substantial equity in the property above the 1st. This is discussed in the paragraph discussing fourth and fifth rights below.

The second of those rights is to cure the 1st. This is accomplished by the counterclaim for the right to cure. In other words, if the 2nd wishes to cure the delinquencies to the 1st, the 2nd asks the court to order that it has that right. If that order is obtained, the 2nd cures the 1st and proceeds as described in Part 1 above. Of course, the 2nd can also buy the 1st as described in Part 1 above.
The third right is the 2nd’s right to know when the 1st stops its foreclosure so that the 2nd may foreclose itself. In a judicial foreclosure if the 1st stops its foreclosure, the 2nd will know this if it is involved as described in this Part 3. The 2nd may continue its foreclosure in the 1st’s judicial foreclosure even when the 1st has stopped its foreclosure.

One version of the fourth of those rights is the right to overbid the successful bidder at the 1st’s foreclosure sale when there is substantial equity in the property above the 1st mortgage and when there is no redemption period for the 2nd after the 1st’s foreclosure sale. This is accomplished by obtaining a judgment on the 2nd in the 1st’s judicial foreclosure. Such a judgment will allow the 2nd to credit bid up to the total amount owed on the 2nd’s judgment. What is owed on the 1st’s judgment must be paid in cash. This avoids this cash outlay for the 2nd and avoids the “circular effect” described in Part 2 above. If there is substantial equity above the 1st or only nominal equity and the 1st’s bid is unexpectedly low (creating equity), this method must be employed if the 2nd wishes to reap that equity.

The second version of the fourth of those rights is to redeem the successful bid at the 1st’s foreclosure sale during the time prescribed by law after the 1st’s foreclosure sale (only CO, KS, MN, WY). As noted above, redemption can be tricky and should be entrusted to an attorney. When done properly in a judicial foreclosure it involves paying the successful bidder its bid in cash. Again, other inferior lienholders may then redeem the 2nd, but the redeemer must pay what the 2nd paid to redeem, plus the total amount owed the 2nd. If no inferior lienholder to the 2nd redeems, the 2nd gets a deed to the property free and clear of all liens.

The fifth of those rights is the right to excess funds from the 1st’s foreclosure sale. This assumes that a third party was the successful bidder for more than what was owed the 1st. These excess funds in a judicial foreclosure are usually held by the Court to be disbursed to the 2nd and other inferior lienholders in order of their priority. In any judicial foreclosure, it is clear that these excess funds must promptly be disbursed to the 2nd who has obtained a judgment. If the 2nd has not obtained a judgment, the 2nd may have to obtain a judgment before it gets its disbursement.

Part 4: 2nd’s Involvement When It Holds Both 1st and 2nd Mortgages

When the 2nd holds both the 1st and 2nd, and a non-judicial foreclosure is permitted, a foreclosure of the 2nd only should be pursued. In such a foreclosure, if the debtor wishes to cure, the delinquencies on both the 1st and 2nd can be demanded. If the debtor or inferior lienholder redeems or a third party is the successful bidder, the 1st is not affected. If none of these things occur, the 2nd will get free and clear title and release its 1st.

When the 2nd holds both the 1st and 2nd and only a judicial foreclosure is permitted or is elected, a foreclosure of both the 1st and 2nd should be pursued. A judgment is obtained on the 1st and separate judgment is obtained on the 2nd. A foreclosure sale is held on the 1st at which a credit bid on both judgments can be made up to the total of both judgments. If only a judgment on the 1st is obtained, a credit bid by the 2nd on the amount that is owed in the 2nd may not be permitted. In other words, when a separate judgment on the 2nd is not obtained, any bid by the 2nd must be in cash, even though what is owed on the 1st will be paid it and what is owed on the 2nd will also be paid it (the “circular effect” described in Part 2 above). Simply put, obtaining separate judgments on the 1st and 2nd allows the holder to credit bid, i.e. not put-out any cash, at the foreclosure sale.
If the successful bidder at such a sale is a 3rd party, the holder of the 1st and 2nd will be paid their debts up to the total owed on both to the extent the successful bid pays them. The same is true if the debtor or an inferior lienholder redeems.

Part 5: Deficiency Suits

Regardless of whether the foreclosure is a judicial or non-judicial foreclosure of a 1st or 2nd mortgage, many states prohibit any mortgagee from suing for a deficiency (i.e. the amount of the debt remaining after subtracting therefrom the successful bid). A Deficiency Judgment Table is part of our article “How to Bid at a Foreclosure Sale”. That a deficiency may not be permitted should not influence what is bid at a foreclosure sale (See same article). In some states, a judicial foreclosure may avoid this prohibition (See same article). On rare occasions, the debtor is solvent enough to pay a 2nd mortgage from assets other than the mortgaged property. In such a case, if very little will be realized on the 2nd mortgage by the 2nd mortgagee’s foreclosure, it might be best for the 2nd not to foreclose on its 2nd to avoid the prohibition against a deficiency. The 2nd would then only sue on the note secured by its 2nd.

When permitted, a deficiency suit and/or suit on the note alone is basically a simple lawsuit against the persons liable on the note. Those persons must be served personally. They cannot be served by publication. After the judgment is obtained, non-exempt wages, non-exempt bank accounts or other non-exempt assets can be taken to pay the judgment. In TX and FL wages cannot be taken (garnished).