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Default Loan Action

Mortgages are created using trust deeds (TD), with the property as collateral for the loan. If the trustor defaults on the first TD, the second TD holder can reinstate the first Trust Deed and start default action against the trustor.

If the property’s value is higher than the total amount owed on the first TD, it is a wise move for the second TD holder to start his or her own default and sale action. If the property is foreclosed upon, and sold at the first trust deed auction, in which the proceeds are less than the combined total of the first and second loan, the holder of the first TD will be paid first out of the auction proceeds and second TD holder will be paid the remaining balance. Because the lender in second position is more likely to loose money than the lender in first position, the interest rates on second mortgages are usually higher.
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