If I'm financing a purchase with 2 different loans. The majority lender will have first mortgage position. The second lender will have second mortgage position.
In case of default, there is only one property to give to the lenders. I can't exactly split up the property into parts, can I?
No, you can’t. In the event of default the second mtg typically gets totally screwed, hence their higher rates, then they come after you.
@Patrick Philip it is basically up to the lenders to fight it out. If the first mortgage forecloses the second mortgage is wiped out. However any amount paid at the auction over the amount due on the first mortgage goes to pay the second mortgage. The second mortgage can also buy the property at the foreclosure auction to protect their interest.
If the second mortgage forecloses first they take it subject to the first mortgage.
Generally the second is counting on the auction sale generating enough to pay both the first and the second mortgages.