What Happens To The Second Deed Of Trust If The First Forecloses?

Almost all foreclosures these days are brought by the first mortgage or deed of trust. That’s because with plummeting house values, only the first mortgage has a chance of getting some of their money back out of the house. Most seconds are usually unsecured.

The normal situation is that the first mortgage on the house was equal to 80 to 90% of its value when purchased. Values went up and the homeowner borrowed against the equity in the property to get a second mortgage or line of credit. This paid off some bills, or was used for home improvements, a child’s education or new vehicle. That actually made some sense since the interest paid on this new loan was deductible, and the value of the house was just going up and up.

But then the market went haywire, and the house’s value began to plummet. Now, the house isn’t worth as much as it was when purchased. That means that the second mortgage isn’t secured, because there is no value of the house left over after the security interest of the first mortgage.

So the first forecloses. (For a full analysis of what happens in California after a foreclosure, see my friend and colleague, Michael Doan’s excellent post.)

What happens to the second? It becomes an unsecured loan enforceable like any other unsecured loan. This is true even in states where there is no deficiency judgment available after a foreclosure, like California. That means that the holder can sue the homeowner, get a judgment, attach wages or other assets and generally pursue any legal remedies.

Is there anything you can do? Yes, most of the time you can make it go away: speak with a competent bankruptcy attorney. A bankruptcy isn’t going to injure your credit rating any more than the foreclosure just did.