Second mortgage foreclosure scenario

[Sean S.]

Say a second mortgage lender forecloses on a home. They're owed $100K and the lender on the first is also owed $100K. The 2 lenders work together and set the minimum bid at the auction to $200K. The lender on the second hasn't bought out the first so if nobody bids, they take ownership of the home subject to the first. If a third party purchases the home at auction for the minimum bid at $200K, both liens are paid and the title is clean. 

Is this something that happens? 

[John Slater]

Hi, No. The max the lender can open bidding is what is owed to that lender. So if the second is foreclosing for $100k, and it sells at $100k, the first is still in place.

[Wayne Brooks]

@Sean S. As @John Slater mentioned, you can only set your credit bid at a maximum of your debt. Also, at least here, any surplus bid Above your debt goes to the Owner of the property, Not to a superior lien holder. If you are the second mtg holder foreclosing, you need to communicate, and maybe make some arrears payments to the first, after you have title…..as you, or any other bidder, will be taking title subject to the first.

[Sean S.]

Thanks @John Slater and @Wayne Brooks. If you then do see that the minimum bid is set to double the amount of the second mtg, what could be the reason? The second mtg in my real world case is a hard money loan and even at a 10% interest rate, it would not double in the 4 years since it became due. 

I've been told that perhaps the second mtg bought out the first, but wouldn't that be recorded? 

[Jay Hinrichs]

Quote from @Sean S.:

Thanks @John Slater and @Wayne Brooks. If you then do see that the minimum bid is set to double the amount of the second mtg, what could be the reason? The second mtg in my real world case is a hard money loan and even at a 10% interest rate, it would not double in the 4 years since it became due. 

I've been told that perhaps the second mtg bought out the first, but wouldn't that be recorded? 

Wayne, in CA  OR WA the states I am most familiar with, overage only goes to the owner when all junior mortgages and liens have been satisfied.. Trustee or foreclosure attorney distributes .  

Sounds like the second has bought out the first.  I dont think that is public record they just paid it off. And since they advanced the money they are allowed to add that to their foreclosure and thats how you get to double ..

[John Slater]

Quote from @Sean S.:

Thanks @John Slater and @Wayne Brooks. If you then do see that the minimum bid is set to double the amount of the second mtg, what could be the reason? The second mtg in my real world case is a hard money loan and even at a 10% interest rate, it would not double in the 4 years since it became due. 

I've been told that perhaps the second mtg bought out the first, but wouldn't that be recorded? 

Hope you dont mind me posting reply here now I looked it up... but great for others to read and learn also.

So I see what you mean. So, based on the 2nd loan being a private money loan, it will no doubt have extortionate fees and penalties and increasing interest when in default. Their default goes all the way back on the 2nd loan to 11.2020 when 2nd lender issued NOD for $375k. 4.2021 they issued NTS for 395k. Then re issued the NTS 1/2023 for over $779k. So it's not that they doubled it, more likely they've just imposed crazy penalties. All that said, it looks like it was sold at auction and is 3rd party owned. I don't see date of sale, but in addition, there's a mechanics lien posted on 3/7 for $80k which would have been wiped out when the second foreclosure, but has presumably been posted after the sale date, which probably then won't make sense if the claim was against the owner who's now lost the property... and finally, the first mortgage was $500 back in 2007, so thats still needs to be satisfied.

[Sean S.]

Thank you @John Slater. I have a copy of the second mtg trust deed but not the note itself to see the terms of the default clause, which I imagine are crazy as you say. That said, even if  the rate doubled to 20 percent immediately and applied for 4 years, it still wouldn't get you from 300 to 779. So the penalties would have to be very crazy. 

And thank you, @Jay Hinrichs. A buyout makes sense to me but it would also mean the minimum bid is less than the amounts owed on both the first and second mtgs combined—I'm told that's pretty common. 

[Sherief Elbassuoni]

Nope, The max open bid from the lender is what is owed to that lender

[John Slater]

Quote from @Sean S.:

Thank you @John Slater. I have a copy of the second mtg trust deed but not the note itself to see the terms of the default clause, which I imagine are crazy as you say. That said, even if  the rate doubled to 20 percent immediately and applied for 4 years, it still wouldn't get you from 300 to 779. So the penalties would have to be very crazy. 

And thank you, @Jay Hinrichs. A buyout makes sense to me but it would also mean the minimum bid is less than the amounts owed on both the first and second mtgs combined—I'm told that's pretty common. 

 I understand.  I've never seen a buyout like you mention.  Truth is the lenders dont care about each other enough for that.  2nd foreclosures, gets their money which it looks like they did, they now don't care what happens to new buyer, old owner, or the first lender who will likely foreclosure for themselves.  It's not just a 'don't care', legally 2nd and 1st work separately.