The Legality

• Your second mortgage is secured by your home, just as your first mortgage is. This means that legally, the second mortgage lender can foreclose on your property if you default on the loan, just as your primary lender can. It does not matter if your primary mortgage is current because the lending contract gives your other lender this right. The law requires that proceeds from the foreclosure sale go first to pay off the primary mortgage, then the secondary mortgage and any other liens on the property.
  
  

The Reality

• Foreclosing is an expensive process for lenders that offers a poor economic return. This is even truer with a second mortgage because the lender has to sell the home at a price high enough to pay off the primary mortgage first before receiving any money for the second mortgage. This means that the secondary lender may be more willing to negotiate once they realize that you have no way to repay the loan. If you are current on your primary mortgage, that lender may opt to buy out the secondary lender's loan to prevent foreclosure, provided the home has enough value to make this beneficial.
  
  

Foreclosure

• If the second lender decides to foreclose, the process works similarly to the foreclosure process of a primary mortgage. After a set period outlined by state law, the home is sold at auction or foreclosure sale. The proceeds from the sale must pay the primary lender first, regardless of the status of that loan. Any money left over is then used to pay the secondary lender.
  
  

Negotiating

• Historically, second mortgage lenders are unwilling to negotiate when the homeowner first approaches them in an attempt to set up a payment plan or settlement. When the lender reaches the point that it is certain the homeowner cannot repay what is owed or will opt for bankruptcy, it may soften its stance and negotiate a settlement. If you are in a position where you need to negotiate, do not be easily deterred by a lender who says "no" in the beginning.