We informed the borrower of the default with certified mail. 

Good choice!

It was a business expense and an investment we were willing to make for good long term tenants.Since the unit you rent to them is currently uninhabitable, you could offer them some choices: 1.

So, the new lender already has evidence the borrowers don't stick to the terms of previous loans.  

Yes, they still carry a higher interest rate (5 - 8% 1st position, 8 - 14% in 2nd), but the interest rate would be even higher if we were to lend unsecured (which we don't).We use our own lending documents and the borrower is responsible for all origin and administration fees.  

We don't work for money - money works for us.If you share that paradigm, then make your choice in that light, but do consider your overall financial plan as a whole, not just this one aspect.

The good thing is: this is one problem that WILL solve itself with time ;)As to whether they'll trust you: there are a lot of intangibles about the choices people make.

I could go lower in property prices that I search for but those are in areas that most people wouldn't want to live in if they had a choice.

If you are going to invest outside your local area, you really should pick one or two choices and make trips and hook up with some locals in the area.

Usually the lender and appraiser will have no problem with releasing it to the borrower.