2nd lien bank foreclosure - excess funds go to 1st lien?

Westchester County, New York
Foreclosures
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2nd lien bank foreclosure - excess funds go to 1st lien?

Sean Stewart
Member since 2022 · 6 posts · 2 votes

Scenario: 2nd lien bank foreclosure auction ~ $50k judgement/fee/interests.  Winning Bid at auction $100k.  1st lien owed $150k (not in foreclosure yet)

My question: Does any winning bid over the 2nd lien credit bid automatically apply/pay toward the 1st lien creditor?  Meaning, does that 1st lien lender (so not technically a subordinate lien) receive the additional $50k at the closing, essentially reducing their position to $50k?

Put another way, where does the $50k over the 2nd lien go?

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
4y
Quote from @Jy Kasnett:

I dont see why the surplus bypasses the 1st lienholder?? They have a LIEN on the property meaning if it sells in any way shape or form they must benefit up until the debt owed to them...how would it possibly go to the 2nd lien holder or even the former owner in this case?

Because that’s the way the law works.  This is Not an ordinary sale, where of course the first lien gets paid in full.  This is a court ordered enforcement of a second mtg…that second mtg holder gets paid, up to the amount of their lien.  The reason why the first lien holder does Not get paid, is because any lien holders junior to the foreclosing lien get wiped out, so they get paid from any proceeds.  If there are no junior liens, the owner gets the surplus.  The legal theory is that the first lien still has their lien and is not prejudiced by junior lien foreclosure.
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  • Marty Boardman
    Real Estate Investor and Instructor · Gilbert, AZ · Member since 2010 · 303 posts · 332 votes
    4y

    Good question. My answer is...

    I don't know. But I don't think the first mortgage holder would get that money.

    The winning bidder (and new owner) would have to payoff the entire first mortgage. Those surplus funds (sometimes called excess proceeds) would likely go to the former owner of the property (unless there are other creditors in 3rd lien, and so on, positions).

    2Reply
  • Chad U.
    Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes
    4y
    Quote from @Sean Stewart:

    Scenario: 2nd lien bank foreclosure auction ~ $50k judgement/fee/interests.  Winning Bid at auction $100k.  1st lien owed $150k (not in foreclosure yet)

    My question: Does any winning bid over the 2nd lien credit bid automatically apply/pay toward the 1st lien creditor?  Meaning, does that 1st lien lender (so not technically a subordinate lien) receive the additional $50k at the closing, essentially reducing their position to $50k?

    Put another way, where does the $50k over the 2nd lien go?


     As per my response to your other post, any surplus goes to the next lienholder in line and if there are none, goes to the owner.  The 1st lien remains intact, so they need to initiate foreclosure to recoup their funds. 

    0Reply
  • Sean Stewart
    OP
    Member since 2022 · 6 posts · 2 votes
    4y

    Thank you, Chad!  Must have missed that notification.

    0Reply
  • Miranda Holland
    Lender · Macon, GA · Member since 2015 · 191 posts · 59 votes
    4y

    If I'm reading your scenario correctly, the 2nd lien holder gets no money at all. The second lien holder should have never foreclosed because the 1st lien holder gets paid 1st. And the first lien holder doesn't mind taking the 50k hit because he was likely to take a much bigger hit anyway. The 2nd lien holder did the 1st a huge favor. Now if the property sells for 200k at auction, the 2nd lien holder will get their money. 

    But if the property sells for more than 200k at auction, the excess funds is SUPPOSED to go to the BORROWER (HOMEOWNER). But, the funds usually ends up going to the county because the borrower doesn't know they had a right to that money. 

    1Reply
  • Chad U.
    Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes
    4y
    Quote from @Miranda Holland:

    If I'm reading your scenario correctly, the 2nd lien holder gets no money at all. The second lien holder should have never foreclosed because the 1st lien holder gets paid 1st. And the first lien holder doesn't mind taking the 50k hit because he was likely to take a much bigger hit anyway. The 2nd lien holder did the 1st a huge favor. Now if the property sells for 200k at auction, the 2nd lien holder will get their money. 

    But if the property sells for more than 200k at auction, the excess funds is SUPPOSED to go to the BORROWER (HOMEOWNER). But, the funds usually ends up going to the county because the borrower doesn't know they had a right to that money. 

    Not entirely correct.  The 2nd lien holder gets paid out of the auction proceeds up to whatever is owed to them.  The surplus goes to next in line or the owner.   Whomever bought the property at the auction takes title subject to the 1st lien.  The 1st can still foreclose to try and recoup their funds, and the new owner would lose title to the property unless they pay it off.

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    4y

    Chad is correct. The first is not effected in any way. Your buying the house with the lien attached.

    I just had this happen in PA where someone overbid the 2nd more than payoff and homeowner got the $. Foreclosure buyer didn’t know what they were buying and didn’t realize my loan is still on property.

    Now they want to negotiate with me and I am easily covered with equity in property. Now they must pay me or we could foreclose.

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    1Reply
  • Miranda Holland
    Lender · Macon, GA · Member since 2015 · 191 posts · 59 votes
    4y
    Quote from @Chris Seveney:

    Chad is correct. The first is not effected in any way. Your buying the house with the lien attached.

    I just had this happen in PA where someone overbid the 2nd more than payoff and homeowner got the $. Foreclosure buyer didn’t know what they were buying and didn’t realize my loan is still on property.

    Now they want to negotiate with me and I am easily covered with equity in property. Now they must pay me or we could foreclose.


     We're you in 1st position or 2nd? 

    0Reply
  • Jy Kasnett
    Member since 2018 · 27 posts · 3 votes
    4y

    I dont see why the surplus bypasses the 1st lienholder?? They have a LIEN on the property meaning if it sells in any way shape or form they must benefit up until the debt owed to them...how would it possibly go to the 2nd lien holder or even the former owner in this case?

    1Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    4y
    Quote from @Jy Kasnett:

    I dont see why the surplus bypasses the 1st lienholder?? They have a LIEN on the property meaning if it sells in any way shape or form they must benefit up until the debt owed to them...how would it possibly go to the 2nd lien holder or even the former owner in this case?

    Because that’s the way the law works.  This is Not an ordinary sale, where of course the first lien gets paid in full.  This is a court ordered enforcement of a second mtg…that second mtg holder gets paid, up to the amount of their lien.  The reason why the first lien holder does Not get paid, is because any lien holders junior to the foreclosing lien get wiped out, so they get paid from any proceeds.  If there are no junior liens, the owner gets the surplus.  The legal theory is that the first lien still has their lien and is not prejudiced by junior lien foreclosure.
    3Reply
  • Tom GimerBusiness Member
    DMV · Member since 2017 · 3k+ posts · 3k+ votes
    4y

    The 1st lienholder is not even a party to a 2nd lien foreclosure case. No notice. No right to surplus funds. The 1st lien is not affected.

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    0Reply
  • Sergey A. Petrov
    Real Estate Consultant · Seattle, WA · Member since 2022 · 1k+ posts · 784 votes
    4y

    As everyone said, the first is unaffected and doesn’t get paid with any surpluses. The property is acquired with the first still intact along with unpaid property taxes, federal liens, and any other encumbrances that are superior to the second 

    0Reply
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