Wiped Junior Liens and Credit Reports
Investor · Jefferson City, MO · Member since 2013 · 309 posts · 100 votes
In doing due dil on a newly released tape of junior liens, I see several properties on this that are listed by Zillow as being already sold. I have several questions related to this circumstance.
1) Why are these tapes being released with liens that apparently are no longer valid?
2) If property was sold either by a traditional sale or a short sale, the second lienholder would have had to be paid off to clear the title Is this correct? In this case, the credit report would reflect this account as being "closed"?
3) If it were foreclosed on and taken back by the lender, the junior liens would become unsecured debt. What would appear on the credit report in this case? I am assuming that the property would not be listed since the lien is no longer attached to the property?
Credit reports are for credit not title. Trying to use a credit report for other reasons is going to mislead you. Credit reporting is not conducted by all creditors. Accounts can be sold and show as closed but still be active at the new creditor. Reporting of accounts may not be current. Some other issues as well.
A second lien which survives a foreclosure would typically be from lack of proper notice and identification to be foreclosed. In other words, the lien was not given proper notice for its right to redeem. This would mean the foreclosure would have to be vacated and redone. That is not a title claim. Title insurance doesn't protect for such things. The foreclosure would have to be redone and the missing interested party must be given their right to redeem which includes the statutory time to do so.
A second lien doesn't need to be paid at all if the first forecloses. The second lien, along with all other interested parties in the property, are noticed of the foreclosure and get their right to redeem the property from foreclosure to protect their interest. If the junior interest holder (junior liens or borrower, etc) fails to redeem they will be foreclosed. Foreclosure is the termination of the right of redemption. The debts (if any) remain, where allowed by state law, liabilities of the borrower. Those creditors have no interest in the property. The debt is then unsecured.
Closing on a loan with a third party is not common. It is true that FCI will act as a "clearing agent" for the trade. Do not confuse that function with real property title companies daily business. It is not even close. An attorney could act as a clearing agent but often when the attorney is working with one side or the other, debates occur on the interest they protect.
Further, typically a loan sale contract does not include provisions of escrow or bailee to allow for trades to clear in that manner. This means that when that arrangement is desired you will need to produce a separate document which deals with all the terms of the trade clearing or modify the contract. Not a DIY. The defense against not having a clearing arrangement is typically the buyback period for failure to deliver the require documents within a set period of time.
Also - Watermark is a joke.
Closing with a title company does not grant an existing mortgage title insurance. A lender's title policy is purchased at the time of origination. In a secondary market transaction an endorsement can be purchased which will validate the lien and priority. That product is not commonly purchased in residential loans away from newbies. We have never purchased such a product nor suffered any harm for not doing so.
Learning to do title abstracts is a good goal. There is more to good abstracts than simply checking the subject property. Borrowers can have blanket liens filed at the county level for judgements. Newbies are highly prone to believe what they see or find is all there is, which can be misleading. Best to simply have a real title report vendor do the work and create the report for you.
I don't know of any Seller, including myself, that would deliver a file without funds. The typical settlement is payment vs delivery not delivery vs payment.
I wouldn't be relying on credit reports to determine validity or status of liens. I've gotten tapes where they were All paid off/foreclosed out.
Hi Sandy
One of the most important steps in due diligence is making sure you know what you are buying and who you are buying it from. You can spend time and money on deals that don't go anywhere....that's part of the business...but you want to avoid spinning your wheels.
If a seller sends you a tape and says something like..... "I'm not sure whats left in this tape....see if you can find any value"....you know to expect a mixed bag of secured and unsecured, deeply underwater BK13, demolished, significant back taxes, tax sales etc etc. You may find a few that are still good.....you may not - but you know that when you start.
A lot of tapes reach the end of their life-cycle in small pools on the flip-market. They were once lines on a big tape of several hundred/thousand loans that have moved from bigger funds to smaller buyers. The seller or broker may not know much about the tape as they may have done little or no DD.
These are situations where you need to be careful....its a wheel-spinning opportunity!
To answer your specific questions:
1. How much time can you afford to spend on checking if the liens are secure? If its 100 loans, you can invest a day checking - maybe its good practice. If you find 10 unsecured in a row...that probably gives you a flavor of whats to come.
2. In theory the second lien needs to be released if the property was sold. In practice, that's pretty much always the case too. We have a few title-claims running right now. The property was sold and the second lien (we own) was not settled. This is the exception though...not the rule! I agree with @Wayne Brooks....the credit report is definitely not a reliable place to check title. You need a lien and vesting report from Realquest (or whoever you subscribe to for title)
3. Again, credit reports are not 100% accurate and certainly not appropriate for lien research..... you shouldn't depend on them. It could be that the Servicer of the second lien wasn't reporting to the credit agencies and there is no mention of the second lien on the report. It could be that the second is reported as "closed' or "transferred" or "180 days late". You shouldn't make a purchase decision based on any of it.
Spend time building a relationship with your seller....thats probably the easiest way to avoid unnecessary wheel spinning!
good luck!
Paul
@Paul Birkett Thanks for a all the great info! I didn't know that a property could be sold without settling on the second liens. I thought that it had to be paid to convey clear title. What happened in your case? Did they just not pick up your loan on title thus it is the fault of the title company or is it ever the case that there is money set aside to pay off the junior liens but they are having problems locating the junior lienholder? I assume that if it didn't get picked up by the title company it gets paid for by them via the title insurance?
This is a common practise on platforms such as FCI Exchange and Watermark. You have to do your due diligence. Buyer Beware. Do a title search and see what has been recorded. This would be a good opportunity for you to learn to do your own preliminary title repot.
Also close with a lawyer or title company and do not release funds until you have a COMPLETE file and title report. Make sure there is no break in chain of title.
What is the process when you close using a title company on notes? Is it the same as if you were actually buying the property? Does closing with a title company buy you title insurance?
Credit reports are for credit not title. Trying to use a credit report for other reasons is going to mislead you. Credit reporting is not conducted by all creditors. Accounts can be sold and show as closed but still be active at the new creditor. Reporting of accounts may not be current. Some other issues as well.
A second lien which survives a foreclosure would typically be from lack of proper notice and identification to be foreclosed. In other words, the lien was not given proper notice for its right to redeem. This would mean the foreclosure would have to be vacated and redone. That is not a title claim. Title insurance doesn't protect for such things. The foreclosure would have to be redone and the missing interested party must be given their right to redeem which includes the statutory time to do so.
A second lien doesn't need to be paid at all if the first forecloses. The second lien, along with all other interested parties in the property, are noticed of the foreclosure and get their right to redeem the property from foreclosure to protect their interest. If the junior interest holder (junior liens or borrower, etc) fails to redeem they will be foreclosed. Foreclosure is the termination of the right of redemption. The debts (if any) remain, where allowed by state law, liabilities of the borrower. Those creditors have no interest in the property. The debt is then unsecured.
Closing on a loan with a third party is not common. It is true that FCI will act as a "clearing agent" for the trade. Do not confuse that function with real property title companies daily business. It is not even close. An attorney could act as a clearing agent but often when the attorney is working with one side or the other, debates occur on the interest they protect.
Further, typically a loan sale contract does not include provisions of escrow or bailee to allow for trades to clear in that manner. This means that when that arrangement is desired you will need to produce a separate document which deals with all the terms of the trade clearing or modify the contract. Not a DIY. The defense against not having a clearing arrangement is typically the buyback period for failure to deliver the require documents within a set period of time.
Also - Watermark is a joke.
Closing with a title company does not grant an existing mortgage title insurance. A lender's title policy is purchased at the time of origination. In a secondary market transaction an endorsement can be purchased which will validate the lien and priority. That product is not commonly purchased in residential loans away from newbies. We have never purchased such a product nor suffered any harm for not doing so.
Learning to do title abstracts is a good goal. There is more to good abstracts than simply checking the subject property. Borrowers can have blanket liens filed at the county level for judgements. Newbies are highly prone to believe what they see or find is all there is, which can be misleading. Best to simply have a real title report vendor do the work and create the report for you.
I don't know of any Seller, including myself, that would deliver a file without funds. The typical settlement is payment vs delivery not delivery vs payment.
All good answers – but let's drill down a bit deeper. The data on credit reports is not primary or even secondary – it is tertiary. It is at a minimum 3 steps removed from an obligation. In a recent study it was found that 1 in 4 had significant errors in their credit reports. The US Congress mandated research to be performed and they found 1 in 5 had significant errors in the credit reports.
How does this happen, it is very simple. The data is dumped into massive databases and the databases then use logic algorithms to sift and sort and attribute the data. If the data is dodgy, or the sift and sort is not up to snuff, you get very bad results very quickly.
Data for ongoing obligations is reported reasonably well as it is all programmed into the monitoring software. However, most organizations are very bad on reporting a closed or satisfied account especially when it come to car liens and property liens.
So do not look at credit reports as a gospel – look at them as more of a hint.
For me, I had a 40K paid sat loan from a Florida lender. I have never lived or worked or borrowed in Florida. I tried to have the good news removed from my credit report but “We have no mechanism in place for removing erroneous good credit” was the answer I got. I am not surprise – credit reports have more in common with sausage making then fine timed prime cuts.
In doing due dil on a newly released tape of junior liens, I see several properties on this that are listed by Zillow as being already sold. I have several questions related to this circumstance.
1) Why are these tapes being released with liens that apparently are no longer valid?
2) If property was sold either by a traditional sale or a short sale, the second lienholder would have had to be paid off to clear the title Is this correct? In this case, the credit report would reflect this account as being "closed"?
3) If it were foreclosed on and taken back by the lender, the junior liens would become unsecured debt. What would appear on the credit report in this case? I am assuming that the property would not be listed since the lien is no longer attached to the property?
Can a quite title action after sale to clean up all these mess ?