Bank foreclosed on second position before first

9 Replies

I recently bid (and won) a foreclosure auction in which the bank owns both the first and second positions on a property. For some reason, they decided to foreclose on the second position first - giving me the opportunity to obtain the property. Obviously, the first lien is still in position and would need to be satisfied when the property is sold. My question is this: When I close on this foreclosure next week (obtain the property from the court), the court will award me with the title to the property. How is this going to affect the ownership of the first lien? IF the bank decided to foreclose on their first position due to the original owner not paying on it - how does this affect me? Will I basically just own a second position to the property and get written off? Curious to the thoughts of anyone else that might have been in this situation...

Thanks in advance.

Not sure if it varies from state to state, but in MS when a creditor forecloses on a subordinate lien the first lienholder MUST be satisfied of record meaning that in order for the second lienholder to foreclose he must have the first released...usually by having the second lienholder payoff the first. In your situation, I would seek local legal counsel because in MS your purchase (at least as you have described it) would do NOTHING to remove the existing first lien. My guess is that since the same party held both the first and second positions, they are prepared to release both liens at your "closing". I would recommend counsel though since you could be buying a property SUBJECT TO an existing paramount lien. Good luck

All I know at this point is that I have obtained title to the property from a second position foreclosure. The two notes were held by the same bank, which means they either made a mistake or were trying to obtain all their funds in one swipe? If they would have closed on the first position, I have a feeling that the second would have been written off. I am assuming that I am obtaining title with the first position still intact - which is fine - the property has plenty of equity to cover this if sold. Property is in SC and will probably be listed next week.

I'm not familiar with SC, but a foreclosure of a sobordinate lien does not effect the senior liens. My first question would be did your bid cover both loans?

This could have been a department thing, where the left hand and right hand were not shaking, unlikely but could be. Next, it could have been a tactic, thinking that the second would be lost, foreclosing on the second then bringing the first to the new buyer to payoff in full and if not paid, foreclosing again. You might be had. As Tim mentioned, you need to seek a legal opinion. Might be better to default of the sale, if you have not paid the entire sale amount. Good luck!

Thanks for all the info. The foreclosure bid only covers the second position, but I was aware of the first position before I bid. Ideally, I have obtained control of the property at a lower investment. I just want to know how much control I really have?

Probably, as much as an owner with a first mortgage that may be foreclosed upon. Get an attorney!

It sounds like to me you bought a second position. Many times a lender will try to foreclose on a second to see if a sucker (inexperienced investor) will buy it.

Many fail to ask if they are buying a first position or a second.

You said you know the property has plenty of equity even with the first.How do you know that???

The first could have 1 to 2 years of back payments accumulated over time from making a payment one month,then going for a loan mod,then going for a short sale,or filing a BK.

Over time they could be tens of thousands behind and then you add in penalties,fees,and interest,back escrow,and attorneys feed.

Now the principal balance on the first has ballooned up really big. This doesn't even account for additional liens etc. that can be added on after the second is bought.

Since the first is still on the property many liens can be attached.

Contrary to popular belief the the 1st and the second are 2 different loans with different payments and numbers.The asset manager on one loan has the duty to limit losses for that one loan while the other AM handles the first.

So the first and second positions have different goals in mind.

Many seconds are worthless.

Example had a customer call the other day.

4 bed 3 bath bought in 2006 for 160,000.1st 130,000 second 30,000.

Now properties are selling foreclosure for 89,000 REO. The first is owed about 152,000 with back fees. The second isn't going to spend 152,000 to get an asset worth 89,000 to try to recover 30,000.

They will just sit and wait,or try to sell the note off to a sucker,or sell the note off for a discount and tax write off the rest.

If foreclosed and they get nothing they can sell to an asset recovery company. Options available will depend on state foreclosure laws and collection practices.

If I had just bought the second position, then why am I given title to the property by the court? I guess this is what I need to verify before closing on the sale. Am I getting title (with a first lien attached) or am I just getting the right to the second position? Good thoughts ...

Paying a real estate attorney a few hundred to research for you is well worth saving you from a HUGE mistake.

You need to know what you are or ARE NOT purchasing.

FYI - I closed on this property last Wed. The property is now mine with the first lien in place. I HAVE talked to my attorney and we are starting the eviction process next week, IF the "cash for keys" doesn't work first.

Property will be listed on the site if anyone is interested.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.