Great answer from Kenny Tan. Great to have an attrney respond. Kenny brought up a great point about the single action law. If the 2nd did foreclose I believe that would be their single allowable action. To Jane Grant's comment I would say that I have seen many 2nd trust deed holders foreclose "subject to" the 1st lien. They don't neccessarily have to pay them off, at foreclosure, when they take title.
Another good avenue to have seller do his/her due diligence on would be SB931. Maybe if the 2nd loses right to deficiency because of the single action law the seller would also be protected by SB931 (in CA) from the 1st lien.
In my experience, with proper proactiveness with an attorney, CPA, and experienced Realtor (in a short sale) the Seller can get out of deficiency judgements and tax ramafications. Again, this is not advice and each situation is different and needs to be counseled by licensed professionals in each category...
Is this a judicial or non-judicial foreclosure? Sorry I didn't get the earlier question. Also is this residential or commercial? I assume below that it is residential.
There are a few reasons why the borrower need not worry about the possibility of a deficiency judgment.
First, if the second as well as the first are both purchase money loans, they are non-recourse and the lenders can't seek deficiency judgment.
Second, say the second is a refi, hence a recourse loan. When the second forecloses and acquires title, it is now barred by the one-action rule to go after the borrower for deficiency.
Third, regardless of whether the second is a recourse or non-recourse loan, if the second submits a full credit bid (in most cases they would), the full credit bid rule bars any further action (except for fraud by the borrower like submitting a false loan application) against the borrower.
Fourth, as a practical matter, lenders don't come after defaulting borrowers for the one practical reason - why throw good money after bad ones. I've been doing foreclosure defense since the crisis began in 2007.