A mortgage loan has two parts: the Note and the Mortgage. The Note represents the borrower's promise to repay the loan, and the Mortgage creates a lien against the borrower's home to secure the performance of the borrower's repayment obligation.
When a mortgage loan borrower defaults in repaying the loan, New York law gives the holder of the mortgage the right, at its option, to: (a) foreclose the lien of the mortgage; or (b) sue on the Note to obtain a money judgment. This right exists regardless of whether the mortgage is a "first mortgage" or a "second mortgage."
It soumds like the holder of your second mortgage has chosen to sue on its Note to obtain a money judgment. This is legally permissible, provided that: (a) you are in default in the payment of the second mortgage Note; and (b) the lawsuit is commenced and prosecuted in accordance with the rules of procedure which are applicable to it. As a practical matter, you would not be able to successfully complete a short sale of your property without securing the consent of ALL lien holders--including the holder of your second mortgage. If you can negotiate an agreeable payment to each of your lenders, the pendency of a suit for a judgment on your second mortgage Note would not be a big problem: the plaintiff in that lawsuit would simply discontinue the action--or, if a judgment has been obtained, provide a satisfaction of judgment--at the time of the closing of the short sale.
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