The simple short answer is yes, if the senior lien forecloses and the value of the house is less than his lien, your lien gets wiped out.
Both Mark and Terri offer sound advice. However, the first step is a mathematical exercise of determining the value of the house, the value of the liens, the cost of clearing tax liens, and what you can get from the house if you come to own it. This usually takes a realtor. Then the next step, if there is value in owning the property, is to negotiate with the first lien holder to see if you can purchase its lien at a sufficient discount to make doing so financially worthwhile. Then you can foreclose on the owner. Then you can move in or rent it out. I can assist you through these computations and the negotiations for a fee.
If the first is $40K and the house is in Sunnyvale or Santa Clara, it seems clear to me that you ought to buy the first.
To answer your question: If the first forecloses, you will most likely be wiped out. See an attorney. The rest of the options put forth by the first lender sound self serving.
Mark Burns, Realtor
Coldwell Banker Elite - Top 2% Worldwide
DRE #00896552 Licensed since 1985
Over 600 Homes Sold in Silicon Valley
I agree with Mark. If the first forecloses the second may be wiped out. If there is value and you are in position to buy out the first and secure your second that may be an option to preserve your own deed of trust.
If they are attempting to do a short sale both the first and second will have to agree to the terms of the short sale otherwise it will not close escrow.
You can pay off the first or bring the delinquent liens current. I suggest you understand the extent of any liens prior to your lien before taking this route. You being in a secondary position you may have a request for notice in place, for first, property taxes, insurances, etc. for which you may be subordinate to.
All the best to you.