What happens if a second mortgagee is not properly named in a foreclosure action?

Full question:

We are trying to purchase a home that is in foreclosure. The home has a second mortgage on it. The second mortgage company that was served the foreclosure notice (and is the recorded mortgage at the clerk's office) is not the mortgage company that holds the current second mortgage. Are they considered to have been served if the original second mortgage company was the company served during the initial foreclosure procedure?

• Category: Real Property
• Subcategory: Foreclosure
• Date: 04/07/2025
• State: Oklahoma

Answer:

A mortgage holder bringing a suit for foreclosure in court must join any "necessary" parties to the case. To understand what a necessary party is, it must be realized that the purpose of a foreclosure sale is to sell the property as it was when the mortgage was first taken out. Anyone who acquired an interest in the property after the mortgage was taken out must be dealt with in the court case before the property can be sold.

Necessary parties include parties who acquired easements, liens, or leases after the mortgage being foreclosed was executed. They can be added, or "joined" to the case as parties without their consent. The intent is to terminate their interest in the property. If a party is not joined, then their interest in the property is not affected by the foreclosure, and the purchaser does not acquire an interest in the property fee of their rights.

For example, if party A takes out a mortgage from party B and then takes out a second mortgage from party C, and party B decides to foreclose on the property and sell the property to party D at foreclosure, party B must extinguish the interest of party C to sell the property to party D. Otherwise party C can enforce their mortgage on party D.

The other type of party involved in a foreclosure case is called a "proper" party. A proper party is a party that is useful, but not necessary, to a foreclosure case. An example would be a party who had an interest in the property before the mortgage was executed. Since this party would not be affected by the foreclosure, the individual is considered a voluntary party to a case and normally cannot be included in the case without consenting to it. However, often courts will require these parties to be joined anyway to the case to clarify their status with respect to the mortgage being foreclosed upon.

Normally, subordinate liens such as a second mortgage are foreclosed out at the time of the foreclosure sale. If a second mortgagee has assigned its interest in a secured second mortgage to another lender, Oklahoma statutes state:

"all assignments of mortgages at present existing, bearing date prior to the taking effect of this act, shall within four (4) months next succeeding the taking effect of this act be recorded in the proper county of this state, in accordance with the provisions of Section 1, of this act, whether such assignments be acknowledged or not, and in case such assignments are not recorded within the time herein provided, the payment of any interest or principal on the debts secured by such mortgages to the mortgagees or the assignees whose assignments appear last of record after the expiration of the time herein provided, and before the recording of such assignments, shall be and constitute a complete defense to any action on such mortgage or note or other evidence of indebtedness secured thereby as against the mortgagor, his heirs, personal representatives, or assigns: Provided, however, that the last assignee of an unrecorded assignment shall have a right of action against the assignor to whom such interest or principal is paid; and provided further, that where the mortgagor, his heirs, personal representatives, or assigns have actual notice or knowledge of such assignment or transfer, then in such case such payment shall constitute no defense, and none of the provisions of this act shall apply. Provided, this section applies only to mortgages which have been on record six (6) months or more."

Therefore, the facts of the particular situation regarding the second mortgage would have to be examined to see if there indeed was an assignment of the second mortgage. If there was and service was not made on the proper second mortgagee, that lender may try to file to open the foreclosure to reinstate its rights. However, if they were successful, they would have satisfy the outstanding balance of the first mortgage in order to gain title to the property.