Two simultaneous first mortgages on a property, one is foreclosing, what happens?

11 Replies

Consider this scenario:

1. Bob is purchasing a home, and starts applying for mortgages, and is shopping around.  Home purchase price is $500k.

2.  Two banks, namely Bank A and Bank B, offer him a first mortgage, each in the amount of $300k.

3.  Sneakily, Bob accepts both mortgages, and each bank is not aware of the other bank's mortgage.

4. Bob gets both mortgages, and uses $500k of the $600k received to purchase the home, and pockets the additional $100k.

5.  Bank A's mortgage contract date is 01/01/14, and recording date is 01/10/14.

6.  Bank B's mortgage contract date is 01/02/14, and recording date is 01/09/14 (earlier thank Bank's recording date).

What happens in this case?  Which lien gets priority?   Both banks did not receive adequate notice of each other's encumbrances.

Can Bank B foreclose on owner, claiming first priority, due to an earlier recording date (but later contract date)?

Quick answer is this: Bank B's mortgage takes precedence. It goes by recorded date. Oh...and Bob is likely going to jail for mortgage fraud.

First guy that crosses the finish line wins. Bank B! There can be 28 mortgages and it depends on which is recorded first, second, etc etc.

John Thedford, Real Estate Agent in FL (#BK3098153)
239-200-5600

I would say B also, EXCEPT in PA we have a 10 day to record rule that if a document is recorded within 10 days of execution then the date of execution becomes the date of record. Given that A recorded within 10 days, A would have an earlier date of record and so A would have priority in PA under the example circumstances.

Then there is the concept of "equitable subrogation" that would come into play if this was a refi. 

It depends if he is in a "race" state or "notice" state. 

For example, Louisiana is a race state, meaning that recorded date establishes legitimacy. In this vacuum scenario Mortgage B would have a superior claim. 

Texas is a notice state, which means Instrument date, regardless of filing date determines legitimacy. Mortgage A would have a superior claim.

So it depends on that particular governing bodies statutes to answer your question.  

No other factors considered, I think this was dilemma you were trying to answer.

Hope it helped.

JCB

It is not likely to happen at all as banks checking on all last credit scores requests and more likely avoid this situation at all or second bank will figure out it during recording

Thanks for your answers.  I live in Florida, so assume Florida.   I think in Florida the recording date is the defining method of prioritization.

From all these answers, I would presume Bank B is able to foreclose out Bank A (not vice versa), and Bank A is out of luck and should have done a last-second title check just before recording their mortgage...

But, what if Bank A even did the last-second title check, and found that Bank B had already recorded a mortgage?  At this point, wouldn't Bank A already have given the money to the buyer and the mortgage is already executed?   Bank A could say "Oh crap, there's a freaking Bank B", and then not record its mortgage...but what would it do after this?

In Florida Bank B would have the senior mortgage. The senior mortgage could foreclose, name Bank A and wipe out that junior mortgage. If Bank A forecloses they can name Bank B, but a junior mortgage can not wipe out a senior mortgage. Rather, they would be taking "subject to" the Bank B mortgage since B is the senior mortgage. 

The most important fact for the Bank in this scenario is that both likely got a lenders policy insuring their senior position so Bank A has a title claim. 

@Allan B. This is the oldest attempted scam on banks there is, they were trying this at least 50 years ago. South Florida has an outstanding reputation for fraud, and if you want to maintain that you've got to get more creative than this! Of course, there's old faithful to try.....get a HELOC, or two, the day before you close on the sale of a property.

@Guy Gimenez

Interesting, I did not know that.  I'm coming from the Oil and Gas World, and dealt with deeds and Oil leases both of which the instrument date is dominant.  I went and looked briefly for a reference on this topic and did not find one.  I found some great stuff on Tax Liens though.  If you happen to have a link hand I would love to study it a little more in depth to understand why they operate Deed's of Trust this way. 

I think I will remove my prior post, so as not to spread disinformation.

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