If a Second Deed of Trust Is Foreclosed What Happens to the First Deed of Trust?

A deed of trust represents a homeowner's agreement to repay a mortgage loan. In contrast to a mortgage, a deed of trust involves three parties: the borrower, the lender and an impartial, third-party trustee who holds the property in trust for the benefit of the lender. The trustee may foreclose on a deed of trust if the borrower defaults on the loan. A second deed of trust, like a first deed of trust, secures the loan against the property's value.

Priority

In simplest terms, if a second deed of trust is foreclosed, nothing happens to the first deed of trust. A second deed of trust is called just that, because it is recorded after the first deed of trust and is second in priority as far as property liens (ownership interests) are concerned. That is not to say, the lender for your second deed of trust cannot initiate foreclosure proceedings if you default on the loan.

Effects

Since a second deed of trust is second in priority, if the value of your property should fall below the amount you owe on your first deed, the second deed becomes an unsecured loan. Holders of unsecured loans are the last in line to be paid in bankruptcy judgments and similarly, the second deed holder in a foreclosure gets paid after the holder of the first deed.

Significance

A second loan for a property can be difficult to obtain and often comes with a considerably higher rate of interest, as the lender assumes a bigger risk of losing money on the investment. Even if the lender of the second deed of trust initiates a foreclosure, the first deed lender will be paid first, and the second deed lender only gets paid if any funds remain.

Considerations

If the second deed holder forecloses, the first deed holder will not necessarily foreclose as well, and often it is the case that a homeowner is delinquent on a second loan, but remains current on the first. Alternatively, the holder of the first deed may opt to buy out the second deed holder's interest in your property, or the second deed holder can buy out the first deed holder. It is beneficial for both lenders to have only one lender controlling both deeds of trust, and there is no increased risk if the property's appraisal value is higher than the combined loan balances.

Property Taxes

Any outstanding state property taxes trump all other creditors. If you are current on your first deed of trust and are only delinquent on property taxes, the first deed lender may pay your taxes to remain in the position of senior lien holder.