Lending 101—what determines 1st position?

Question

This sounds like a ridiculous question as I'm asking it, but I have heard of people thinking they are in 1st position when it turns out they're actually in 2nd ... since I am new to lending, I want to know what specific document or verbiage a lender would require to ensure they are in first lien position. Thanks for your help!

Don Konipol · Answer

@Elaine Hester

Not only the first to file their lien, but actually the first to file any lien or encumbrance.  So if a contractor is not paid and files a mechanics lien before you file your mortgage and note, then the mechanics lien is in first position.

The exception to this is property taxes.  When property taxes are not paid, sometimes for a period of years, the taxing authority automatically has a lien equal to the unpaid tax, interest and penalties.  These liens jump ahead of all other liens file before.  This is why most mortgages call for an escrow of taxes, so it doesn’t turn into a lien superior to the mortgage lien.

It is possible that in some instances a lien holder in first position will subordinate to a new first, however subordination is more often used when a first lien is being refinanced with a new loan but the inferior lien is not being paid off.  This often requires a pay down of the inferior lien as an enticement to subordinate.

Jay Hinrichs · Answer

you send escrow instructions to your title and escrow company that you are in position to make said loan when they can insure you in first position.   first is the first one in time on record..

Michael Ealy · Answer

Elaine,

Ohio is first to record.

However, like most states, tax liens take priority over all other mortgages and liens.

Jay Hinrichs · Answer

I personally know of no other states were material men liens properly recorded with certified letter pre lien notices and filed within statutory limits jump ahead of everything but tax's .. and Believe me I learned the hard way during the GFC .. if subs don't pre lien correctly or miss the timing they then file unjust enrichment claims which are a stain on title..

Jay Hinrichs · Answer

and in Oregon a properly filed materialman lien goes into first position.. that's why this state is one of the absolute best to be a contractor. especially if there is a loan.. YOU WILL GET PAID

Don Konipol · Answer

the location of the property determines which laws apply

Don Konipol · Answer

@Elaine Hester

Sounds like you already made the loan, thought you were in first lien position and now your not to sure.  Any title company or real estate attorney or even an individual familiar with the county clerks office and property records bureau can do a chain of title search and determine your lien position.  Most county real property records are now online, the search might cost a few bucks.

In every single county, in every single state, lien position is determined by timing of filing the mortgage or deed of trust, exceptions being when a superior lien subordinates or a lien for unpaid property taxes.

Almost all professional prepared mortgage notes state a default rate of interest, usually much higher than the interest being charged on the face of the note.  So when a borrower defaults in some way, you can send him a notice to accelerate, which demands payment in full while also triggering the default rate of interest until the note is paid off.  If the borrower and you then come to an agreement for him to make the note current, or add the arrears to the principal balance, or some combination of the two, you would then ‘reinstate’ the note.

Each state lays out the specific requirement to be followed to foreclose.  California is a trust deed state and not a mortgage state so you don’t use judicial foreclosure.  The trustee of the deed of trust, under your instructions, will send a demand letter to the borrower.  The borrower has a certain period of time to either pay off the loan in full or bring it current, or cure any other items of default.  Once that period of time elapses and the borrower does not cure the default, the trustee will file for a foreclosure sale with the county, notice the borrower, and comply with all other requirements under California foreclosure laws.

After the waiting period ends, depending on the trust deed, the type of property, the type of loan being foreclosed on, and the state the property is located in, either the trustee or a designated county official will conduct a foreclosure sale.  At the sale all inferior liens will be wiped out, all superior liens will remain in place.  The property will be sold to the highest all cash bidder.  You protect yourself from a low winning bid by putting in a bid for the amount your owed.  If your bid is the winning bid, your note is payment for property ownership.

This is an extremely simplified version, various strategies and tactics can be used depending on whether or not you want to own the property, want to be able to sue the borrower for any loss you incurr ( not possible with residential o/o property in California), or just want the highest bid regardless and don’t want to own the property.

Don’t they teach this in California public schools?  LOL

Craig Jeppesen · Answer

Whoever files first is in first position. A refinance requires a subordination agreement to move the new loan to first position which means they get paid first in case of foreclosure.

Michael Ealy · Answer

Depends on your state. Usually, the first to file the lien is the first lien holder. Ask a real estate attorney in your state.

Elaine Hester · Answer

@Michael Ealy, it appears that the loan in question may be in your state (OH) ... any particular nuances to note there?

Lending 101—what determines 1st position?

Most Popular Reply