From a note owners perspective, I'm a little confused regarding what happens to excess equity when the note owner is forced to foreclose.
Lets say for example, I own a 2nd mortgage. For simplicity lets assume there is 30k excess equity after the 1st and 2nd lien are paid in full. Debtor defaults and I am forced to foreclose. Who receives this extra 30k equity?
My second question: Does this answer change if there is only a 1st mortgage and note holder is forced to foreclose and take over the property? To me it would seem they are now the new owner, and can sell the property for anything they like.
Can someone more seasoned than myself explain this in laymen terms?
Good question and one debated here, but others are wrong :)
State law dictates the interest conveyed, mortgage states and trust states differ, but in all states the is the "court of equity". It's an issue that a note and security agreement is given as collateral to cover the obligation, not intended to provide a windfall of profits from a note. The Uniform Commercial Cods cover the collateral a lender is entitled to and it depends if the loan was a cash loan or one funded with equity, equity loans are installment purchases and ownership reverts back to the lender/seller.
While some states, like Florida say you obtain title as an owner, the buyer or borrower can still sue you in courts of equity to obtain any overages.
Some states require any overage from amounts owing, plus allowable costs of collection to be paid to the borrower.
A second has no relevance as to homestead exemptions, it's the total amounts owing. Homestead exemptions reflect the equity arising from the thinking in of English Law as to equity. Such amounts may be out of bounds of creditors.
Thinking you can buy a note and obtain a note is not the right thinking, those are tow different interests conveyed, an old saying, once a lender always a lender, meaning that if you buy a note you have no more rights in or to the property or collateral than the original lender.
Buying a seller financed note, an equity funded note changes the flavor, equity notes are installment contracts that revert back to a seller, buying one changes the matter to a cash basis to the extent of the price paid, amounts above that may be viewed as equity amounts, not that a borrower evades that part of the obligation but in some cases it may be treated differently, like bankruptcy.
Best thinking is to use the collateral to cover the outstanding balance owing, of all loans, plus allowable costs under state law in foreclosure and the excess reverts back as excess equity to the borrower, you get your money back, that's what you're entitled to. :)
My Cards aren't doing well.....:)
Updated over 4 years ago
The "others are wrong" comment was meant with a bit of humor, but we have plenty of "experts" here who have never been in a bank loan and asset management department, nor in any compliance department. What is or can be done is sometimes different than wha
The simpler answer is nothing happens to the equity when you foreclose since there's no transfer of money unless someone buys it at auction. Your question assumes that you're foreclosing for 70k and someone is going to bid 100k?
Just last week a house in my neighborhood was sold as an REO for 110k when I previously saw it go unsold at the trustee sale for 86k. It happens all the time.
Thanks guys I appreciate the response. I think this clears it up for me a little more.
Equity is only established when the collateral is sold, in Patrick's comment, that bank then had $24K established as an equity amount, over the unpaid balance and costs of foreclosure. Then, the bank will deduct from that equity the costs and expenses of holding the collateral and the sale. The remaining amounts are surplus amounts of equity that is due the owner. That goes back to my previous post. Don't confuse rights of redemption time lines with equity interests arising from the sale of any type of collateral, that statute of limitations is usually 3 years depending on state laws. :)
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