A homeowner in Terre Haute, Indiana has a first mortgage of $150,000 and a home equity line of credit (HELOC) secured by a second mortgage of $40,000. The homeowner defaults and the first mortgage lender initiates foreclosure. The property sells at a sheriff's sale for $165,000. After paying the first mortgage balance of $150,000 and foreclosure costs of $8,000, which of the following correctly describes what happens to the second mortgage holder?

Correct Answer

B) The second mortgage holder receives nothing from the sale and may pursue a deficiency judgment for the full $40,000

After paying the first mortgage balance ($150,000) and foreclosure costs ($8,000), the remaining proceeds total $7,000 ($165,000 - $150,000 - $8,000). The second mortgage holder is entitled to receive these remaining proceeds ($7,000) from the sale. However, since the full $40,000 HELOC balance is not satisfied, the second mortgage lien is extinguished by the foreclosure, and the second mortgage holder may pursue a deficiency judgment against the borrower for the unsatisfied balance of $33,000 ($40,000 - $7,000). Option B is the closest correct answer because it correctly identifies that the second mortgage holder receives nothing meaningful (only $7,000 of $40,000 owed) and can pursue a deficiency judgment, though the exact deficiency amount would be $33,000. Note: In Indiana judicial foreclosure, junior liens are extinguished by a senior lienholder's foreclosure if properly joined in the action.