Junior Lien Issue On My Foreclosure Purchase...

57 Replies

Hello - I'm hoping someone on BP can point me in the right direction.

I bought and rehabbed a home at a foreclosure auction. I now have the home under contract for sale, but it appears I overlooked an issue with a junior lien on the property. I'm looking for advice on how best to proceed! 

Here is the situation...


The home had two liens against it - the original mortgage, and a line of credit. Both liens were held by the same mortgagee.

Lis Pendens were filed on both liens within a couple of months of one another. The senior lien then reached judgment, and went to auction, where I bid on the home and won. I assumed (incorrectly, of course, I'm a foreclosure newbie), that since the bank on each lien was the same, and that I was bidding on the action on the senior lien, that the junior lien would be resolved automatically.

My title agent is stating that since the mortgage company did not name themselves as a defendant on the senior lien lawsuit, that their junior lien is still outstanding and must be resolved before we can sell the house. So that’s the question - how best to proceed???

I think I have two options - I can contact the lender and see if they are willing to give me a lien release. The other option would be to file a lawsuit, which would take time and money, obviously. If I do this, would it be considered a quiet title action, an additional foreclosure, or what? Also, does anyone have tips on reaching the right person / group at the bank to discuss this? It's a regional institution.


Thanks for your help!

Hi Justin,

Your title agent is correct in that since they didn't name the junior lien in the foreclosure filing, then it isn't cleared and would still remain.  I believe that is the State Law in Florida.  However, it is quite interesting that they are one and the same, so should have been wiped automatically.  In any event, I would consult with a good real estate attorney on the matter.  If you need one, let me know and I can recommend one.  

@Wayne Brooks   maybe you can shed some light on this situation?  

Hey @Chad Urbshott  .  Yes, even though the same lender held both mortgages, they as the junior mortgagee would have to be listed as an additional defendant.  There really is no basis for a suit against the lender, the first or the second.  You are now the title holder, not a lien holder.  Some will suggest a Quiet Title suit, but that has no merit here, and could only serve to possibly, just possibly, get the 2nd mtg holder to the negotiating table, or so that's the theory of some.  I have seen instances where one lender holds the first and second on a property, and forecloses on the second, but not the first.  I wonder if that's intentional...hoping for some bidder's confusion or ignorance....or just happenstance.

Trying to negotiate out the second seems the best approach.  On this occasion, I would probably actually recommend having your RE attorney do it.  He can speak legalese, rattle some sabers, etc. in regard to proper foreclosure procedures, yadda yadda yadda.  Hopefully the foreclosure file contains the actual loan number which will help in identifying the specific loan.

Thanks guys. As you can imagine my mind is swimming at the moment with this.

Just to make sure I'm following (I'm slow, obviously :P ) ...

Even though the 'normal practice' is to list the junior lien holders on the foreclosure action, since this was not done in this instance, then the junior lien persists???

I'm sure if I hire a lawyer (which I will do shortly) they will make the argument that 'standard practices' were not followed... but I'm trying to gauge whether that would be a meritless argument or not? That seems to be what you're saying, correct?

I've actually owned the property for nearly 2 years at this point. I'm trying to weigh my options and am wondering if I need to change strategies and rent the place out again to raise as much cash as I can until the bank decides to do something and fight the battle then... all avenues here are going to put a major damper on my ability to invest and on my net worth. Feeling really foolish tonight :-/

Originally posted by @Wayne Brooks:

...  I have seen instances where one lender holds the first and second on a property, and forecloses on the second, but not the first.  I wonder if that's intentional...hoping for some bidder's confusion or ignorance....or just happenstance.

... 

That's just smart. If there is any bidder other than the lender, then the lender gets paid for both the junior and senior liens and the lender doesn't have to take it as REO to get paid; if the bidder doesn't pay up on the senior lien, the lender then gets to foreclose on the senior debt to get paid. If no bidders, then nothing really changes since the bank gets the REO and will have to sell it as high as possible to get re-paid as much as possible. In either case, the lender didn't have two sets of foreclosure costs to pay out.

Just want to re-frame my situation so that there isn't any confusion if anyone else takes a look at this and wants to respond... in my situation, it was the senior lien that was foreclosed, which is what I bid on and won. The oddity is that the same bank had a junior lien on the property and didn't list themselves as defendant in the senior lien foreclosure suit. It's the question of validity of their junior lien which my title agent says clouds my title.

I feel your pain, been stung before on courthouse auctions as well.  

I'm surprised that you've owned this for 2 years and nothing from the bank has surfaced yet.  Yep, time to get your RE attorney looking into - I'm no legal expert, but he may be able to reopen the foreclosure file and question the validity of the bank's action. However, this may be futile, but since 2 years have lapsed and they haven't taken action may help your cause.  I'm interested to know the outcome, please keep us posted.  

Thanks for the encouragement @Chad Urbshott  !!

I will definitely keep you posted as things progress. I have consulted my real estate attorney, and he seemed to be as surprised by the circumstances as I was. I'm wondering about posting on here now that eventual litigation seems necessary.

I am definitely interested in your referral for a RE attorney. I do trust mine, but I will probably get a couple eyes on this before I recalculate my strategy. Here is another interesting detail for the group. I had an earlier contract on this home that fell through (VA financing). By my memory we already had a title commitment on that deal. I went back through my emails and found one from the closing agent that stated we had a title commitment which correctly noticed a tax lien on the property, but mentioned nothing of this situation... so this escaped even a title company!! I do not have a copy of the title commitment itself, though, so it was possibly an oversight by the closing agent. I'm trying to calculate a way to get my hands on that commitment without raising any interest in why I was getting it after the fact...

I'm still shocked that I haven't heard any big bewares of this issue in the past. You hear all manner of warnings to watch out for senior leans but nothing about 'watch out for a lender with both a senior and junior lean who doesn't sue itself in the foreclosure auction' warnings anywhere. Is this a widely known issue?? 

Just trying to make this point multiple times as a warning to others on BP. I researched foreclosure auctions for long while before jumping in and had never heard of this issue before now!!!

Interesting turn of events!  Now there's an outstanding tax lien as well?  The whole thing sounds kind of fishy and the bank must have an ulterior motive on this property.  

If you want a second opinion, reach out to Daniel Wagner & Associates. He's located in Miami which is a little far from Jax, but he's a straight shooter and can tell you upfront whether you have a case or not plus whether he can help you.  

Good luck with everything.  

Not a tax lien - just a certificate sale. I was using the taxes as a source of capital and figured we would clear it up at the closing table. Now of course I will just need to take care of them... fun fun. :P

@Dustin DuFault  

The two mortgages were not missed by the title search, and there was no type of oversight.  Both mtgs appeared in the title search I'm sure.  No "big deal" was made of it, because if you read Any Title policy commitment it specifically excludes, and is predicated on them being paid off, any existing mtg.s, lien. taxes, etc. noted in the title search.

Yeah, that previous title commitment was contingent upon any open liens being paid off at closing.  The open lien would likely have come to your attention closer to closing if the deal hadn't fallen through.

Judicial foreclosure isn't my area, but it doesn't seem that far out to me for the lender not to name themselves as 2nd lien holder. You said the 2nd was a line of credit. Maybe a different division of the bank or entirely different entity that wanted the option to pursue a deficiency on the HELOC. Or they had some other reason to opt themselves out.

What kind of numbers are we talking about? What is the outstanding lien, and what is the current resale value? 

I'd be careful of using an attorney who said he's never seen a lender opt out of naming themselves when they are the jr. lender.  You don't really want him to be learning on your dime at $400/hr.

First off...I would have your attorney contact the lender (like mentioned above) and explain the situation. They may very well give you the release you need. Banks don't like fighting through foreclosures and having to deal with holding and dumping REO's. As an aside...having not gone through a REO purchase before, I would think there should have been some indication of outstanding open liens on the closing statement that should have been caught at that time.

Did you purchase the owner's policy based on the title commitment that was produced? If not...shame on you if you were intending to hold the property! ;) If you did, check the policy and see if the lien/s are listed as exceptions. If they are then keep on track working with the lender. If they aren't on the owner's title policy then the title company is on the hook to clear this up on their dime.

Originally posted by @Jim Viens:

First off...I would have your attorney contact the lender (like mentioned above) and explain the situation. They may very well give you the release you need. Banks don't like fighting through foreclosures and having to deal with holding and dumping REO's. As an aside...having not gone through a REO purchase before, I would think there should have been some indication of outstanding open liens on the closing statement that should have been caught at that time.

Did you purchase the owner's policy based on the title commitment that was produced? If not...shame on you if you were intending to hold the property! ;) If you did, check the policy and see if the lien/s are listed as exceptions. If they are then keep on track working with the lender. If they aren't on the owner's title policy then the title company is on the hook to clear this up on their dime.

The OP didn't buy the property as an REO. He bought it at the courthouse steps at the foreclosure auction. There was no escrow or closing statement or owner's policy to buy at the time of the sale.

This risk is always there when buying at auction.  Understanding of title, even with a title prelim, won't necessarily protect a buyer from ending up with title or lien problem. We see it here often enough on BP.  It happens to even very experienced buyers at auction.  This is the OP's first auction purchase, though, which seems especially harsh.  

@Chad Urbshott  Thank you for the referral, I will definitely give him a call.

Kristine Marie Poe Thank you for weighing in. I bought the property for $99k and put maybe $20k more into it.... a significant portion of my savings, unfortunately. ARV on the house was $150k. I was originally going to rent it out but decided it was a touch to far away from home base to be worth the trouble. When I had an eviction there I decided to do a mid range renovation and flip it............. little did I know I was throwing good money after bad :/

I'm wondering though if the bank might be clueless about this??? I think the strategy that's rising to the top in my mind is that I need to not 'poke the bear' by making a big deal about this at this point. Their legal action on the second was dismissed for inaction by the judge, and as I mentioned I've now owned the property for nearly 2 years (well in November anyway). If I lay low and rent it out, hopefully I can at least recoup some money over time that way, and who knows maybe I will be able to get their lien dismissed after some number of years???

I realized I wasn't quite clear before and I'm unsure how to edit in this new system.... I meant that I had been renting for a while, had the eviction (my first ever btw - I'm on a real string of bad luck :P ) and then decided to renovate and flip... just wanted to clear that bit up.

@Dustin DuFault  

since the junior is a LOC there is the potential that the amount out on the LOC is small or maybe ( since your due for some good luck here) there is no balance it was paid in full. And a simple release is all that is needed.

I have gotten in this situation with Juniors on the west coast, but mine were weirder  bank said the junior was reconveyed by accident and is still valid.. the bank brought suit and we settled but what was a great deal became a break even deal so at least we did not get hosed.

Auctions from what I can see out your way are far more complicated than our auctions on the west coast.

@Dustin DuFault  

  Correction on my weirder transaction.. What I bought at sale appeared to be a first but was in fact a second according to the bank as they said the first was reconveyed by accident. hard to fight in the courts with the big boys they can just out spend you.

Originally posted by @Jay Hinrichs:

@Dustin DuFault  

since the junior is a LOC there is the potential that the amount out on the LOC is small or maybe ( since your due for some good luck here) there is no balance it was paid in full. And a simple release is all that is needed.

I have gotten in this situation with Juniors on the west coast, but mine were weirder  bank said the junior was reconveyed by accident and is still valid.. the bank brought suit and we settled but what was a great deal became a break even deal so at least we did not get hosed.

Auctions from what I can see out your way are far more complicated than our auctions on the west coast.

Hadn't thought about that. There might be no or little balance on the HELOC.

Dustin:  Has escrow tried to make a demand to get the pay off on the jr. lien?  What's the balance?

I haven't asked escrow to make that request for the payoff amount because I'm nervous about making the bank aware of this situation when they may not be already. 

If I'm reading the situation right --- I think there is a good chance that this was an oversight by the bank. I'd like to map out a few legal strategies and know about the likelihood that I'd prevail under those strategies (as a best guess, of course) before I approach the bank about an amicable resolution. That way I'd know what the game plan will be no matter what their response is.

Is my analysis and strategy correct??? I'm all ears to make sure I'm not overlooking anything, believe me.

As a point of interest - I have the lawyer from Miami looking at case law on 're-foreclosing' the original action. He says he's had it done with a 3rd party bank but is checking the implications of the bank being in both positions. That research is going to cost me $300, which I think is worthwhile. On the other hand my local lawyer/friend is suggesting I have him contact the bank's council that filed the original actions and see if they will go ahead and sign a release. This seems less strategic too me, but of course would be awesome if it worked....

Thank you all for your input!

Originally posted by @Dustin DuFault:

I haven't asked escrow to make that request for the payoff amount because I'm nervous about making the bank aware of this situation when they may not be already. 

If I'm reading the situation right --- I think there is a good chance that this was an oversight by the bank. I'd like to map out a few legal strategies and know about the likelihood that I'd prevail under those strategies (as a best guess, of course) before I approach the bank about an amicable resolution. That way I'd know what the game plan will be no matter what their response is.

Is my analysis and strategy correct??? I'm all ears to make sure I'm not overlooking anything, believe me.

As a point of interest - I have the lawyer from Miami looking at case law on 're-foreclosing' the original action. He says he's had it done with a 3rd party bank but is checking the implications of the bank being in both positions. That research is going to cost me $300, which I think is worthwhile. On the other hand my local lawyer/friend is suggesting I have him contact the bank's council that filed the original actions and see if they will go ahead and sign a release. This seems less strategic too me, but of course would be awesome if it worked....

Thank you all for your input!

OMG.  You don't even know if there is a balance? What was the limit on the line of credit? Having escrow make a payoff demand is really the first step in my opinion. Making a payoff demand may generate a payoff amount.  Or it may generate a lien release if there is zero balance.  I doubt it's going call attention to itself in a way that could harm you. 

I'm not sure why you keep coming back to a possible oversight by the bank. For whatever reason, they left the HELOC out of the foreclosure and now are in first position. With or without an "oversight" right now they are a secured lender with a lien on record. But if there is no balance or a very low balance, maybe you're making a big deal out of nothing. What if it's as simple escrow faxing them a demand and them faxing back a lien release. I'd start there.

That's great insight, and thank you for your candor. When it comes to the mechanics of how things happen at the title company, I am definitely a newbie. I was not aware that I could request a payoff on that lien without raising it to the attention of the bank in a significant way. The LOC was for $71k. Let's hope it's on the low end of that balance :/

My point about it being an oversight is not about that being a part of a legal strategy - I understand that regardless they are in first position at this point. It's more that without me bringing it to their attention, I'd at least have the option of renting the property to recover some capital until it comes up down the road, when they take action (or maybe they never do, if it is in fact an oversight). 

It's not my favored option, obviously, but might be the best of some bad choices if I cannot work things out more favorably.

@Dustin DuFault One other question, You say that there were two lis pendens filed, one for each lien. Was there ever a release of the jr. leon lis pendens? Have you looked at the case file to see what amount they were suing for on the HELOC?

@Wayne Brooks   How difficult is it for a layperson to look at foreclosure case files in FL?  Can the OP find any of it online?

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