trustee sale question

7 Replies

Say there is a property up for trustee sale auction, being foreclosed on by the first mortgage company.  The minimum bid is for the total of this first mortgage.  The title search revealed two other liens.  The title company organizing the auction informed the first mortgage of the other liens.   The title company cannot give any title insurance or guarantee of clear title after sale (typical of trustee auctions), but says that the foreclosing mortgage company was informed of these secondary liens and should have informed the second lien holders of the auction.  If the secondary liens were properly informed and the winning bid does not cover them they go away and title is cleared of them (is this correct).  Basically we are relying on the bank to do the right paperwork, no problem (yikes).  

Also say, totally hypothetically, that the auction is coming up soon so there isn't much time and there is an investor that doesn't really know what he is doing, but might be just dumb enough to bid on it.  The second lien holders won't give this poor investor the time of day unless he has some documented ownership or role in the property.  

So what advice would you give this investor.  Is his understanding correct, that the second liens go away as long as they were informed of auction?  If they were informed, but the primary mortgage messed up some detail of the paperwork, how likely is the second lien holder to come after the money (say second is around $15 or 20k).  

This is a great question and unfortunately the answer is "it depends".  I'm curious what types of liens were these two additional liens?  There are some types of liens that may not be extinguished after a foreclosure even if the foreclosing entity was the 1st mortgage.  Some possible examples are: environmental liens, municipal liens, tax liens, etc. 

However, with some exceptions, generally lower level priority liens will be extinguished through the foreclosure process. 

both are bank loans.  Title company says they disappear, but could come after winning bidder if they can show they were not correctly notified.  Trying to get confirmation that they were notified, but getting a solid answer out of a bank when you have no (current) legal right to property is difficult.  

All real estate laws are set by each state. Your question(s) concern the perspective of a junior lien holder as to how s/he is affected when senior mortgage goes to foreclosure sale.

Generally, Junior lien holders are "wiped off" but the debt is not wiped out and remains, but unsecured.

As a junior lien holder, remedies include:

1) advancing funds to cure first mortgage in order to protect position;

2) hoping for a forced sale that generates sufficient surplus (overbid) funds to pay junior debt;

3) litigation to set aside sale due to claim of deficient noticing to junior bene (lien holder)

Junior lien holders' claims for over bids are typically "pro-tanto" in nature, in that they are paid according to order of recordation, absent subordination agreement that would change order of lien position.

If you are considering investing in junior trust deeds or mortgages, be sure to study title laws specific to the state(s) you are considering buying notes in.  

If you've already invested buckle up for an interesting ride. One way or another, you're going to get an education.

One thing @Rick H.  did not mention is that the junior lien holder can have a representative attend the auction and bid up to whatever amount that junior lien holder considers sufficient to make them happy. 

And the OP should read through this next thread:

http://www.biggerpockets.com/forums/41/topics/6897...

@Patrick McGowen  

In my state, the foreclosure trustee pays a noticing service to mail first class AND certified return receipt notice to all juniors of the foreclosing senior lien, per statute.  I'm sure the noticing service has very detailed records that would stand up if ever challenged.  Failure to notice junior liens can cause a big problem.  Are you saying the title company organizing the foreclosure is asking the foreclosing lien holder to notice the juniors?

Your system there is different than ours, but....whether the junior lien holders were Properly notified, or not, shouldn't be a mystery.  Here we can actually see the served summons, but we are a judicial process and everything is in the court file.  I would guess you'd have some type of similar access there, but you may have to look for it.

Thanks all for the info. @Steve Babiak always appreciate your summary lists of previous discussions on topics, much appreciated.   

 @David C. of course there would be a record I should have thought of that, duh.  I found document at county clerk today certifying notification.  We were ready to go for auction Monday morning.    

Is moot point now, seller closed this afternoon with another buyer.  Last I talked to seller on Saturday, he had a buy sell, but since it is a problematic property, no conventional loan possible, we thought it might fall through and we would be ready for trustee auction Monday.  I have to feel good for seller, they had kind of had a rough ride and they will put a little in their pocket this way. Still I am sad.  Would have been a great learning experience.