It is somewhat uncommon for the second mortgage lender to file for foreclosure. In most cases the first mortgage holder will start the process. When a second mortgage holder files for foreclosure like any lien holder they are protecting their interest in the asset. Most times, if a homeowner is too far behind on the second but up to date on the first, the second would declare foreclosure on the house.
It makes more sense for the second lien holder to work with the homeowners to find a solution because the second lien holder in order to take control of the property would have to buy out the first lien holderâ€™s interest. Any lien holder can try to force the sale, but typically itâ€™s the taxes that get paid off first and then the first lien holder gets paid. If a home goes to auction most of the time, there is just not enough proceeds to pay everyone. So in order for the second to actually foreclose and take control of the property, they must buy out the first lien holderâ€™s interest.
In a traditional foreclosure with the first lien holder filing foreclosure, after the auction, the first mortgage is paid off in full then other liens and the second lien would be paid in order of when the lien was filed with the county. That is only if enough money was generated at the auction. However in this market, that rarely occurs. If there is enough money to pay all of the second mortgage, then they would get the balance of the proceeds until their lien is paid in full. Then each additional lien holder gets paid. This is a rare occurrence with declining market values. Bidders at auction are bidding far below market value and even market value is typically less than what is owed on the property.
Even though it is a second lien holder who initiates the process of foreclosure, it will not really change the order of how the liens are paid off through the foreclosure auction. Any winner at the foreclosure auction, whether the bank or a 3rd party, will still end up with a title that has had the liens on it discharged through the county foreclosure auction. From my experience the homeowners will usually be given the option of cash for keys by the lender, where the lender gives them cash to move out or be faced with the possibility of a forced eviction. No matter which lien holder initiates the foreclosure, the process will move through the system in exactly the same way.