Final answer:
When a borrower defaults on a second mortgage, the first mortgage has priority during foreclosure, with the second mortgage lender receiving funds only after the first is paid.
Step-by-step explanation:
If a borrower defaults on one of the mortgages, such as the second mortgage, the consequences can be significant. If the property is foreclosed, the first mortgage has priority, which means the lender of the first mortgage gets paid before any other lenders.
A default on a second mortgage could lead to foreclosure by the second mortgage lender, although they would only receive leftover funds after the first mortgage is paid.
This process emerged from changes in banking laws that allowed for loans, especially subprime loans, to be easily sold to other institutions, leading to increased risk-taking by original lenders.