How Do Foreclosure Auctions Work When Two Lenders are Involved?

A foreclosure auction is the location of choice at which lenders – banks, mortgage companies, etc. – sell their foreclosed properties in order to pay off the remainder of the loans that were defaulted on by homeowners.

Occasionally, a home will be foreclosed on that has two mortgages. These mortgages often are provided by two different lenders: a primary mortgage company (often a bank) and a second mortgage company. There is a set order of precedence when it comes to which creditors – the lenders – are paid and in what order through the proceeds of a foreclosure auction.

This order of precedence depends on the date on which the original loan was approved. If a home has a mortgage from a bank, and then the homeowner takes out another mortgage from either the same bank, another bank, or another lender, the first mortgage (and its lender) is considered the first lien. This is the first debt that will be paid off when the home is sold at foreclosure. The second mortgage, then, would be the second lien.

What happens at a foreclosure auction when two lenders are involved follows this order of precedence. Proceeds from the foreclosure sale will go toward paying off all the creditors who can prove that the property was used as collateral for the loan. This is after any government tax liens are paid, since the government is the first to receive money from the sale.

So, the auction works the same way – the asking price is based off of the remaining debt plus fees, interest, and other charges. The proceeds from the sale go to the government to cover any tax liens, then to the primary lien holder, and then to the second lien holder(s). If the second lien holder does not receive enough money to pay off the debt, it can sue for a deficiency judgment in a recourse state (or sue for the value of the note).