Contacting 1st lienholder as we are 2nd lienholder about to foreclose

33 Replies

I'm having a difficult time getting 1st lienholder to provide details (payoff) to us as we are 2nd lienholder. They don't know but we're about to foreclose.  I know we are entitled to info but what should I provide & to what dept. Obviously customer service is a waste of time. 

IDK TX law but here in CO all lienholders must be informed as part of the foreclosure process.

Does your attorney say you're entitled to information from the first lienholder?  I don't think that's the case, but I could easily be mistaken.  I don't think being a second lienholder creates a mandate that the other lienholders provide you information.  Otherwise, someone could just slap a $1 lien on a property and gain access to information about other loans.  I think @Bob Malecki suggestion about getting an authorization to release information from the borrower is the most likely route to work.

"They don't know but we're about to foreclose."

There is the key. Why should they give you any information to them you are an uninterested party. Foreclose then it becomes a different matter.

Depending on the size of the loaning institution, I call and get a name of a person in loss mitigation and send them a registered letter with a copy of the foreclosure with a note asking if we can work together on the matter. Don't assume you have to make a payoff many banks will allow you to bring the first current if in arrears and as long as you make the monthly payments they don't care. Seek legal counsel on this matter as each state is different in their laws. Seek a seasoned real estate attorney.

If you are going to be in this business over the long haul hook up with a service that will allow you to pull credit reports (soft). There you will get the balance of the first. Also run a soft report each month to make sure the 1st is current.

Also back into your problem. Do a grantee/grantor search find the loan amount and interest rate (on the first) and when the loan was taken out. Run an amortization schedule and that will give you a ball park amount. If you do not have an interest rate choose one. I use 7%. Yes it is a guess as there could be an adjustible involved. Also don't assume the first is in arrears. 

@Jon Holdman  hit the nail on the head.

You are in second position, they don't have to give you anything.  You are NOT entitled to any of their records nor do they have to communicate with you on the matter.  You have a right of redemption 'if' they foreclose.  That is not a right to their records if 'you' foreclose.  Newbie misconception.

If the first (or a senior position) forecloses, the junior's right of redemption kicks in which says you can protect the interests granted by the security instrument and redeem (pay in full) the amount due to the first or senior lien holder.  Only a foreclosure action triggers that right.  

The right is only trigger from a bottom up method.  Meaning, only juniors can redeem seniors.  Seniors do not redeem juniors.  An advance made from junior to senior would could be struck down as an advance and would not be included under the provisions of the documents as an advance made to protect the interest of the lien holder.  A junior lien does not stand to infringe on the priority of the senior so the interest of the senior is not in jeopardy thus and advance should not be made. 

There is this notion by folks new to mortgages who are buying junior liens that they can simply advance, any money forwarded by the Mortgagee which is obligated to be paid back as those funds are "solely" deployed to protect the interests of the Mortgagee, to the Senior holder.  The confusion likely comes from the use of the strategy being confused.  Borrower's are protected to an extent from Mortgagee's making advances and then recovering those advances from the Borrower or the collateral.  

If you make a payment on a senior lien, just because you made the payment does not automatically deem that payment an advance under the security instrument and note.  That means, payments made may not be recoverable through the security instrument and note or property.  I could go into more detail on this idea but for this thread it does not seem relative as the OP is planning to foreclose.  

In order to foreclose you have to serve all interested parties.  So the statement the first don't know about foreclosure is likely because you have not formally conducted that required step in the process.  All lien holders and most parties of interest have to be given their right of redemption specifically.  That is the notice that is sent.  They can redeem from you or not.  That is up to them, but you have to serve them 21 days prior to sale or the sale can be overturned or canceled.  (Texas)

The obvious question here, what the heck do you want or need the first lien holder's balance information for if you are going to foreclose?  

It really makes little sense.  It does nothing for you nor do you needed it or can use it for anything.  Which is why you are also not getting and likely will not get it no matter how many times you call.  I wouldn't give it to you if I was the first.  It serves no purpose but to put the Mortgagee in liability for breach of privacy.  

Why do you think you want/need the first lien balance?






@Dion DePaoli  

  Another BRILLENT  post by Dion!!  I had always assumed one had the right as a junior to advance payments on the first so as the second lien holder you could then  prosecute your foreclosure.. And take title subject to the first.. There by saving foreclosure fee's etc by keeping the first current and not having to pay off the first in full.... Only having to advance sum's necessary to keep the first current .. take title at the foreclosure sale then sell asset payoff first and hopefully you have some equity to make you whole on the second and the amounts advanced.. And further I was ( and it sounds like a misconception) that any monies I did advance to keep the first current ( if in deed the trustor was not paying on both 1st and 2nd) I could add to my credit bid at the Foreclosure sale along with my arrearage's and Trustee's fee's notifications tax's etc.

From how I am reading this post if you were to make payments on the first and the bank was to actually accept them.. your not entitled to them back.. your only remedy is Equity period end of story.

Then Dion  have a question.  When in your business if and when your buying Juniors is it your practice then when you do have to take the asset to protect your investment do you just pay off the first as step one. then prosecute your foreclosure.. There by saving additional late fee's default interest rates  foreclosure costs etc etc that may occur while your in the process of your foreclosure action on the 2nd.  As in a Mortgage state this could take the better parts of a year or more to foreclose.

And would you say that this is a correct statement.. " when buying a second the investor to protect themselves should be able to stroke a check at anytime to payoff the first"  Or is it just a calculated risk those that buy seconds take inherently in the deal... Ie they bought a 30k second for 5k and if it pays great if the first forecloses and its 50k and they don't have the money to pay the first they just walk or try to get the owner to give them a Deed in Lui then try to negotiate with the first so they do not become a wiped out junior?

Lastly I wonder about companies that sell NPN seconds if they spell all this out to Newbie type investors that buy these?

Regarding Dion's question at the end of his post, I can think of one reason why a 2nd lienholder would want to know the balance on the 1st.  The payoff amount can be much higher than the original balance if the 1st has not been paid for some time, i.e., accumulated interest, late fees, and property tax advances are added to the UPB.  I would want to know what I am taking on with a foreclosure before I move forward.  I have heard of scenarios where a 2nd lien investor believes they have some equity but finds after foreclosure that they are entirely underwater.

@Mike Hartzog  

I suspect with this new waive of newbies trying to get into NPN as its RE de jour this is a very common occurance especially low value MId west and rust belt assets.

Pretty easy to establish value in the western states. and on eastern seaboard.. all bets are off in my mind in the mid west especially low value assets.

Originally posted by @Jay Hinrichs :

@Dion DePaoli 

  Another BRILLENT  post by Dion!!  I had always assumed one had the right as a junior to advance payments on the first so as the second lien holder you could then  prosecute your foreclosure.. And take title subject to the first.. There by saving foreclosure fee's etc by keeping the first current and not having to pay off the first in full.... Only having to advance sum's necessary to keep the first current .. take title at the foreclosure sale then sell asset payoff first and hopefully you have some equity to make you whole on the second and the amounts advanced.. And further I was ( and it sounds like a misconception) that any monies I did advance to keep the first current ( if in deed the trustor was not paying on both 1st and 2nd) I could add to my credit bid at the Foreclosure sale along with my arrearage's and Trustee's fee's notifications tax's etc.

From how I am reading this post if you were to make payments on the first and the bank was to actually accept them.. your not entitled to them back.. your only remedy is Equity period end of story.

Then Dion  have a question.  When in your business if and when your buying Juniors is it your practice then when you do have to take the asset to protect your investment do you just pay off the first as step one. then prosecute your foreclosure.. There by saving additional late fee's default interest rates  foreclosure costs etc etc that may occur while your in the process of your foreclosure action on the 2nd.  As in a Mortgage state this could take the better parts of a year or more to foreclose.

And would you say that this is a correct statement.. " when buying a second the investor to protect themselves should be able to stroke a check at anytime to payoff the first"  Or is it just a calculated risk those that buy seconds take inherently in the deal... Ie they bought a 30k second for 5k and if it pays great if the first forecloses and its 50k and they don't have the money to pay the first they just walk or try to get the owner to give them a Deed in Lui then try to negotiate with the first so they do not become a wiped out junior?

Lastly I wonder about companies that sell NPN seconds if they spell all this out to Newbie type investors that buy these?

 There is no right expressly given to a Mortgagee to advance on what ever they want. A good contrast to understand why can be seen if we take a second lien which includes a default rate or a rate of interest charged on advances made when in default. A second lien holder could pay off the entire first lien and charge the borrower the default interest or a higher interest due to lien priority. This is clearly not in the best interest of the Borrower. Second liens would be in the business of paying off firsts when it suits their desire to earn more interest and they could execute such a plan after understanding the payment capacity and propensity of the borrower post origination.

It is also important to note, Borrowers can, will and do contest amounts due under the loan all the time. This 95% of the time is targeted at unwarranted advances made by the Mortgagee. (interest arrears is a bit straight forward in that sense and contested less)  A hot button in this topic area is LPI advances. As a Mortgagee, I can insure the property if insurance is not provided. I can not just advance on insurance at my leisure whenever I want. Nor can I advance such profound sums without contest. None of that would be fair to the borrower.

The language is explicity in every security interest at large. It is not meant to be a universal recovery statement as it could be abused as evidenced above. While it is difficult to pinpoint confusion in these matters as we never know who started the bad information, I would be inclined to think folks confuse this idea with other strategies like a Subject To where the investor takes title to the property. They are not a Mortgagee. As such, the investors "advances" are not advances, they are payments as they are a title owner.

As a second lien holder, I can advance to the first and claim that advance in my bid to foreclose only so far as the advance was necessary to protect my position. If the borrower was making payments on the first and not the second, the second lien can't just make some payments and recover them. (might need to be contested by the borrower but you get the idea)

Any lien position really is under no obligation to accept payments from anyone other than the borrower on the account. (another concept often overlooked) They do from time to time but they don't have to if they don't want to. Just like they don't have to take a partial payment.

These matters are separate stand alone tests. We must not blend them. That is where confusion comes from. A lender can make an advance and include those sums to the court or the trustee. Those sums can be contested by the borrower or other lien holders. Unless they are contested they go unchallenged and can be included. A judicial process may involve a court referee verifying the sums which can also reject what may be claimed as an advance.

IF I purchased a second lien and made payments to a first lien that was was not in default the borrower has substantial grounds to deny those funds being included in the advance numbers. The resulting argument would likely turn to unjust enrichment from the Mortgagee and the Borrower argue equity stripping. The courts would decide who wins. It is not always the Mortgagee.

Let us not forget other lien holders have rights as well. So these arguments are not all from a borrower. A junior lien holder can contest amounts due which deprive their position of recovery due to advances made on a senior position.  (lots of moving pieces, I know)

If the roles reversed, a senior would not have justification to advance on a second since the junior does not infringe on the interests of the first. So there is another example that is not a free for all with advances.

As far as being a second lien investor goes. If you want protection the only way to have that is to have the capital needed to pay in full, which is acting on the inherent right or equity of redemption held by all interested parties, which includes any junior liens. That superior lien must infringe upon the interests not just by priority of record but also by its potential action/outcome. 

Most do not have such resources set aside. Exactly for the reason as mentioned. It is a calculated risk. (though the calculations might be off more than on)  I am not a cheerleader for second liens. More are explicit zeros than not. There is a buzz around them due to easy barrier of entry due to low pricing. There are some successes, as with anything, but it is not a winning propostion in general. The success rate in portfolio is generally shown in market price. So, NPNs with high risk of NO recovery trade for less than 2% of UPB.   The general collection metric for deficiency judgments or other unsecured defaulted debt instruments.  There are no giant funds making a business out of second lien investing. (contrary to popular belief?)  There are no operators that I know of solely involved in seconds. I think that sort of says something. The street level folks are several years late to that party.  I have talked more about second liens ONLY on BP than in normal business.  Capital Markets figured out they were losing propositions long ago (many by going out of business from under performing funds). The secondary market has to play shuffle cup with them because they want to mitigate their losses as much as possible.  This includes getting $1 for something really worth $0.  (Buyer Beware)

Most of the second liens I have seen working with street level investor clients in diligence or considering a trade are way over priced for my liking. I tend to be pretty comfortable in my own skin within this asset class. As such, I stay away from them as investments for the most part.  Many times there are first liens out there not too far up from the barrier of entry for seconds.  

@Dion DePaoli  

I agree on Seconds as being basically worthless and that there are new Guru's and small level companies that are selling them to unsuspecting low capitalized investors thinking they are going to make some big hit by getting them performing. And other they trump up ARV with in house BPO type valuations and then sell them at a modest discount. After the company paid pennies on the dollar as you suggest the true value is... ITs much like those that buy 5k houses in the mid west and big inner cities and resell them to unsuspecting LA based investors or west coast or off shore investors for 40 to 80... claiming them to be cash flow investments.... Like npn these homes soon become non performing rentals and the nice middle man pockets a large fee and is down the road.. same model different spin.

Simple recap.

You must give notice to all lien holders as part of the foreclosure process. After you serve notice, then request the payoff with reference to the foreclosure.

Loans that are in default will have statutory non-accrual periods, a loan in default after giving notice of foreclosure does not continue to accrue interest but additional administrative costs permitted are added.

A senior lien holder with a non-performing loan will generally be in a non-accrual status after notice, depends on redemption rights under state law. You can't bid in amounts required at sale to pay the liens with accruals of interest ticking away. So, to Jay's question, there is no rush really after notice to post sale.  Paying off a senior lien can be added to your amount to foreclose upon, but I don't see doing so, unless required, as it being beneficial since you're bidding in the amount anyway. If the property is not sold then you payoff the senior or, you may have other rights to offset the lien, with or without interest. State law governs. Institutions will often allow individual junior lien holders to assume or refinance that balance, as it is understood, if not provided by law, that a junior lien holder may not be able to cough up cash and the collateral is then be held for sale. Arrangements can vary. You need to understand applicable state laws of the collateral location.   

If the senior lien is performing you order the payoff at the date of sale and pay it as that loan may accrue interest, the owner is still standing with rights to redeem until the heavy set lady sings at the steps. That may be paid by sale proceeds. 

I don't believe, a hunch, that in Texas a non-attorney may conduct a foreclosure, (a RE Broker/Auctioneer may be able to, not sure there) and the Trustee under the Deed of Trust performs the functions required in the process, (or a licensed servicer) so as an individual note holder, you're spinning your wheels attempting to get payoffs. Just give the Trustee the accountings of your note, the proof of demand, the amount in arrears and a copy of the note and deed of trust along with a request for them to act in their capacity as Trustee. They will take it from there. Might mention too, fees of a Trustee are probably governed by state law as well, 10% here. 

I have been the Trustee under Deeds of Trust in MO. an attorney is not required for the sale. That said, title companies get very picky about who was acting as`Trustee and who conducted a sale to insure the next owner. :)      

Originally posted by @Mike Hartzog :

Regarding Dion's question at the end of his post, I can think of one reason why a 2nd lienholder would want to know the balance on the 1st.  The payoff amount can be much higher than the original balance if the 1st has not been paid for some time, i.e., accumulated interest, late fees, and property tax advances are added to the UPB.  I would want to know what I am taking on with a foreclosure before I move forward.  I have heard of scenarios where a 2nd lien investor believes they have some equity but finds after foreclosure that they are entirely underwater.

 As a second lien, who cares what the balance of the first is?  

The first is not being foreclosed.  A second can not simply pay off a first unless it goes into default and expect recovery.  Only when the senior position is foreclosing out a junior should a junior care about the balance of the senior for a payoff.  That right of redemption kicks and and the sum is known to all interested parties in the service of process stating what needs to be paid to halt the action.  Again, that is the right of redemption.  That is really the only right that pertains here.  It is also the only right present.  

A second lien holder derives their balance information from the borrower's credit report.  A second lien holder does not have explicit rights to infringe on the privacy of the borrower with a senior lien holder.  The notion of all these newbie second lien investors fighting to get payoff balances is a bit silly and largely a waste of time and energy.

@Dion DePaoli  

Thanks for your detailed posts here.  This is good information for investors to be aware of.  Personally I haven't become involved with working 2nds.  I was merely pointing out that as a the owner of a non-performing 2nd lien, there are some good reasons to want to understand the status of the 1st lien.  As you mentioned, the borrowers credit report is probably the best source of this data.

@Dion DePaoli @Bill Gulley

Excellent information here, thanks for the education. I personally know from email exchanges with Dion how he feels about non performing seconds as we have chatted about them. And as Jay mentioned above, the attraction may be the low barrier to entry and the perceived upside.

Not to hijack this thread but there is a lot of information "out there" about NPN 2nds, both pro and con, it is important in my mind to understand the process, workouts, exit strategies and Possible traps of any investment, whether it may be RE or stocks etc. So again thank you for the advanced education, as I am very interested in the note space.

So here is a question, my initial thoughts on NPN 2nds were any mortgage lien could survive bankruptcy, and with home prices recently recovering somewhat, a homeowner that was underwater before, may now be in a better place to sell or refinance and would have to make the 2nd position whole before they could do that, is that correct?

And If the homeowner had kept the payments current on the first this would indicate to me they wanted to stay in the home, at least until it had rebounded. So if you bought a NPN 2nd at a discount and made every effort to get it reperforming and failed, the lien would still "live" and be accountable at some point unless it were wiped out by the a court order or first foreclosure etc.? The title abstract would show the lien that you own and the title would be clouded until it was cleared, correct?

So if the average homeowner moves or refinances once every 7 years the odds are good that while your cash flow may be non existent, the UPB on the second would still be your security? That lien would never just vanish, correct?

Originally posted by @Rick Bradd :

@Dion DePaoli @Bill Gulley

So if the average homeowner moves or refinances once every 7 years the odds are good that while your cash flow may be non existent, the UPB on the second would still be your security? That lien would never just vanish, correct?

Your theory makes sense.  However, most of the situations I see where the 1st is current and the 2nd defaults usually end by the borrower eventually defaulting on the 1st.  Most often those 2nds are held by private lenders or were seller carry backs.   

Maybe it's just my market, but it's the rare private lender 2nd that is worth foreclosing on.  Using a foreclosure action to get the borrower to perform and bring the loan current seems like the best outcome.

Maybe Dion could give us a happy (profitable) example of foreclosing on a NPN 2nd.

Originally posted by @Dion DePaoli :
Originally posted by @Jay Hinrichs:

@Dion DePaoli 

 ........  Many times there are first liens out there not too far up from the barrier of entry for seconds.  

This has been my experience.  I've paid as little as $5-10K for non-performing notes in first position with face values of $50K+.  My note deals have been some of my most profitable.  Now that I understand the value of cash flow better, I would gladly pay a lot more for the same notes if I thought I could get them performing.  

Bargain hunting for non performing 1st liens is totally do-able.

@Rick

Well, your assumptions are mostly correct, but a NPN can go pooof into thin air and be worthless. When a lender/note holder fails in collection efforts, giving statutory demands or actively seek payments, the note may be deemed to have been abandoned. Failure to actively seek payments can cause you to lose the entire UPB!

May be a lesser known aspect of due diligence, but buying these you need proof of collection efforts.

Stale notes may not be collectable, but the lien will show up and must be released. I let a second slide, wasn't worth messing with at about 7K, but kept collection efforts current, the first was a slow pay but they kept it up, my demands were falling on deaf ears and they had issues and I knew they were ill and eventually head to a nursing home, or worse, and they were not elderly. I was correct in my assessment, the title company called me for a payoff as they were selling and going to a nursing home, took about 6 years to get to that point. Sale closed I was paid off.  Had it been 70K I would have lowered the hammer.

You mention modifications, understand that modifying a note is a new extension of credit, if it is an owner occupied, 1-4 family, that note then falls under Dodd-Frank as sellers are exempt from origination issues to a point, a note holder who purchased a note who deals in notes will be in a lending status. Use a RMLO.

Another way to avoid a RMLO, is to.....and this may sound odd, but use an attorney and have the attorney represent the borrower, if you have a good relationship with that borrower as they will be subject to foreclosure. Let the attorney "negotiate" new terms and then extend the obligation. Doing this allows an attorney to originate a note in connection with their providing legal representations. It is the exception allowing an attorney to originate a note. If the attorney were to represent you, the shoe is on the other foot, they would be going toward foreclosure and they can't work for a lender as a note originator. :)  

@Bill Gulley  

  in our state the attorney must be a RMLO..  But I like that in most venues.

As K Marie points out  1st are were its at.. much simpler.

Bill one statement you made about interest stops accruing once a foreclosure has been filed.  Is that how I am reading what you said?  in our state interest accrues right up until the day of sale.. It is not suspended.. Maybe I did not read that point correctly.  

Non-accrual is federal, UCC in seizure of collateral of a secured debt.

The accounting may differ as to the security interest taken, being a Trust state or Deed State and the type lender, lenders go to a non-accrual, a private lender be not be under the requirement.   

 If a lender has been charging interest to a foreclosure sale date, they have an issue,  If you've ever done a sale, you need the bid amount to register prior to sale, if you use per diem interest to the date of sale date, entering that bid then becomes incorrect if it is paid during any redemption period prior to sale, a borrower could pay it off one or two days prior to sale, the Trustee would have to redo the payoff, Trustees don't (not obligated to) compute payoffs, the note holder/servicer does. The registered bid amount is then not correct.  Trustee's fees are generally limited, a Trustee may see such errors as cause to call off a sale, don't worry, you'd be charged attorney fees. Depends on local requirements and state law as to how bid amounts are registered, usually with court having jurisdiction.

GAAP also covers this, a non-performing note goes to non-accrual status for those that are under GAAP requirements, a private lender isn't under such compliance.

It's what and how I was trained, what someone actually does, who knows, I'd bet you could find errors in 2/3 of the foreclosures done, if not more. After a foreclosure in residential collateral, not many borrowers seek an audit and examine for compliance, they usually walk away, I imagine some might or do.  :)

@Bill Gulley  

having bought bunch's of court house steps properties and being a lender who has foreclosed on my borrowers ( more than I care to mention) But in the NOD there is always a section that calls for interest rate and a daily rate that is added to the balance .. And as you state the trustee calculates this daily rate of interest or interest and principal to come up with the final opening bid if one is bidding a full credit bid and not a step bid or short bid. And it usually takes a few days to get an unpaid balance from the trustee either if you paying off prior to the foreclosure sale or you get the opening bid day before the sale. and many times they never post the opening bid... So to get an idea how much money you need to bring to the sale... You simply look at the NOD and calculate out the information that is in the document and add a few thousand more for the trustee's fee's and you can get close to what the opening bid will be as I state its a full credit bid.

AS for the accounting aspect well not sure how that is booked... I hire accountants to do that end of it.  

@Bill Gulley  

Yes, continually accruing interest is how the Final Judgment is determined here.  Interest from the default date up through the judgment date, and sometimes adding the language of interest up through the actual sale date.  These are all judicial, signed off by a judge.

Originally posted by @Jay Hinrichs :

@Dion DePaoli  

...  When in your business if and when your buying Juniors is it your practice then when you do have to take the asset to protect your investment do you just pay off the first as step one. then prosecute your foreclosure.. There by saving additional late fee's default interest rates  foreclosure costs etc etc that may occur while your in the process of your foreclosure action on the 2nd.  As in a Mortgage state this could take the better parts of a year or more to foreclose.

...

As @Boyd McLean posted, the junior does not have to pay off a senior when taking title at foreclosure;  @Dave Van Horn actually works with NPN and that is his practice, to take title subject to the senior and reinstate the senior as needed. And Dave can probably offer

Kristine Marie Poe some real example(s) that she was seeking. 

I hate to stir this profoundly simple matter with a question, but I don't do much in foreclosure law.  Lets assume a second files to foreclose using the foreclosure by publication instead of by judicial process.  Obviously they will only bid what they are owed since the first lien will remain in effect after the sale.  Can they bid below what is owed and then sue for a deficiency (in a recourse loan) in a foreclosure by publication?  Next if the second mortgage holder was previously the owner and sold the property subject to a mortgage, their lien would be for the entire purchase price.  Do they bid the difference between their debt and the first mortgage, or do they bid the entire amount due?  If they bid the entire amount due are they required to pay off the first mortgage when they bid?  I am not trying to be funny I actually have a case that looks like it will go this way and would like to shortcut my research if possible.  It is difficult to explain how poorly the second set of papers was done.  I agreed to help someone out in a moment of weakness never imagining how hard someone worked to bad situation worse.  A flag to @Dion DePaoli and @Bill G. on this one hehe.

@Jerry W.  

 I believe your only entitle to the amount you credit bid in the way of a deficiency.

So lets say your owed 30k and you credit bid 10k and no one bids.. I believe ( and I could certainly be wrong) that you can then only get a judgement for the 10k

Originally posted by @Jerry W.:

I hate to stir this profoundly simple matter with a question, but I don't do much in foreclosure law.  Lets assume a second files to foreclose using the foreclosure by publication instead of by judicial process.  Obviously they will only bid what they are owed since the first lien will remain in effect after the sale.  Can they bid below what is owed and then sue for a deficiency (in a recourse loan) in a foreclosure by publication?  Next if the second mortgage holder was previously the owner and sold the property subject to a mortgage, their lien would be for the entire purchase price.  Do they bid the difference between their debt and the first mortgage, or do they bid the entire amount due?  If they bid the entire amount due are they required to pay off the first mortgage when they bid?  I am not trying to be funny I actually have a case that looks like it will go this way and would like to shortcut my research if possible.  It is difficult to explain how poorly the second set of papers was done.  I agreed to help someone out in a moment of weakness never imagining how hard someone worked to bad situation worse.  A flag to @Dion DePaoli and @Bill G. on this one hehe.

Sounds like you may have a mess if all the questions are to one case, actually what you have are two different issues, one is to finance and financing contracts under the UCC, equity financed in a sale of the secured collateral has two issues: 1. a loan funded by equity may not charge fees, points or other costs in connection with extending credit and 2. equity funded amounts, based on an agreed sale price do not constitute an amount for any deficiency.

As to foreclosure, your state law governs, a note funded with equity is treated as an installment sale. Any loan amount is based on equity arising from a sale contract is part of the consideration paid for the sale, a default in paying terminates the sale agreement and the collateral reverts back to the seller. If the sale is terminated, then there is no equity and no deficiency.

Any lender has an obligation to seek the highest price necessary to pay off any loan secured, they may bid in any price but if you don't seek amounts sufficient to payoff the total obligation, you'll waive rights to seek a deficiency.  

Having a second mortgage, the holder may generally foreclose only on their interest and they may include any senior liens, if those are included then they need to be paid if the property sells. This is a foreclosure matter governed by state law.

With the second holder being on the underlying mortgage, there really is no difference in bidding in just the second or the total amount, the senior lien is assumed. No, you won't get a deficiency on cash amounts unless you pay those amounts.

Might mention, a note that is purchased changes the stripes of an equity funded note as cash is used, that equity is converted to a cash expenditure. A deficiency could be obtained on those amounts. There have been deficiencies obtained on cash amounts and equity amounts discounted as nonexistent.  

If the second, being equity, would foreclose only on their note and security agreement, they would be biding in the full amount of the unpaid balance, plus allowable costs under state law and the costs of sale, as allowed. If the property sold, you'd be paid off and there would be no deficiency. The buyer at the sale would then content with the senior lien.

 If it didn't sell, the holder of the second would take title and, assuming that underlying senior lien was their mortgage, they would assume the existing loan. They would be in title from the foreclosure on their equity funded note. As title reverts back the obligation terminates, there is no deficiency, similar theory to the deed-in-lieu-of-foreclosure. 

Now comes another twist, state law may require foreclosure on installment sales where a borrower has attained a certain amount of equity or has been under contract for a statutory term, to follow foreclosure laws. These laws are to give the installment buyer homestead rights, rights of redemption and the opportunity to obtain excess equity secured, as may be applicable. A sale may then be required if the property failed to sell at the steps, just as a cash funded loan would be, that sale required to pay equities claimed or due a borrower.

 State law concerning equity established by a buyer may require a property to be sold, in that case the property may be sold and any excess above the payoff may then go to that borrower, just as it would with a conventional loan. If a sale is required then there should be equity, there is no deficiency. If the secondary sale can't payoff the 1st and 2nd, it can't be sold, seems you would have tried to meet the spirit of the law as to a borrower's equities. These laws are moving toward laws of equity, treating installment sales similar to a cash funded purchase and mortgage.

Also need to check the tax issues. If you bid in the total amount owing, your client may be subject to taxes on that amount by taking title, amounts assumed by the underlying lien assumption would be deducted if you bid in both amounts. That seller will then have a new basis in the property. 

You need to check state law as to required foreclosure on installment sales, that might add a twist to the note holder's ability to treat the collateral as reverting back from an installment sale, simply taking title and keeping the property and assuming the underlying lien. Tax issues need to be known.

The easiest way, without redemption issues would be to accept a DIL, there are no deficiency amounts available in accepting the deed, and the tax matter will be based on the balance owing as having been paid in full.

Lastly, I mentioned the equity vs cash funded aspects as to a deficiency judgment,  BUT, seeking a deficiency is not a function of the foreclosure process unless stated in foreclosure law, usually a deficiency is sought in a separate proceeding post sale or disposition of the property. Now, another twist, damages. If the collateral was trashed then you have a different cause of action as to a deficiency that may be added to equities lost, if your judge sees a loss of equity arising from damages as well as costs of damages, who knows what a judge would say....... it is possible for one to seek a deficiency on an equity note, it is possible that the court would not catch the difference and it could be possible the court may award a deficiency, that said, financially, no, deficiencies are not proper in an installment sale.   :)

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