Function

• When a homeowner takes out a second mortgage, the second lender uses equity in the home, or real estate value in excess of any outstanding liens against the property, to secure the debt. If the homeowner defaults on the mortgage, both the first and second lender may foreclose on the property, sell the home and use the resulting funds to pay the outstanding debt. According to a 2010 article on the financial website Home Mortgage Nation, either the first or second lender, or any other party with a legal financial stake in the property, may initiate foreclosure proceedings if the debt goes unpaid.
  
  

Bankruptcy

• In some cases, a homeowner may consider filing for bankruptcy protection in an attempt to reduce, restructure or eliminate the debt while retaining the property. However, the lender's lien on the property remains in place even if a bankruptcy court discharges the mortgage debt. Because the second lender retains a lien on the property after bankruptcy, it may still initiate a foreclosure process in order to recoup its investment.
  
  

Considerations

• A primary lender takes priority over any other lenders during a foreclosure. For this reason, funds from the sale for a foreclosed home first go to settling the primary lender's outstanding debt. If any money remains after paying the primary lien holder's claim, the second lender may exercise its claim to the funds.
  
  

Alternatives

• Although real estate values typically increase over time, economic factors sometimes cause values to decline. In extreme cases, the value of a property may sink below the amount of the primary lender's outstanding debt, leaving no equity available for the second lender to claim. Many second lenders will postpone foreclosure in such cases, as they will likely not recover any funds from the process. Instead, second lenders may continue to report missed or late payments to major credit reporting bureaus or employ collection agencies. When real estate values recover and the home price climbs above the primary lender's outstanding balance, the second lender may initiate foreclosure if the debt remains unpaid.
  
  

Settlement

• Some second lenders may negotiate with a troubled homeowner in order to recover outstanding funds without pursuing an expensive foreclosure suit. Some may accept a lump sum payment or a modified payment in lieu of foreclosure.