2nd Mortgage Foreclosure, Confused?
I understand at a 1 st mortgage auction that the 2 nd. gets wiped out. They only receive funds if there is any left over after paying the first. But I also understand other liens like water department or judgement liens or mechanic liens get carryed over to the new owner. Is this correct? Other liens have more protection than a 2 2nd. mortgage.
Thanks
In general, your statement is correct. Why, do you ask, wouldn't a 2nd make a bid at the auction to protect their investment? The answer is a matter of economics. If the 2nd has done a BPO (Brokers Price Opinion) and has determined that the property's ACTUAL value is only high enough to cover the balance of the 1st mtg, then the 2nd would not spend any more funds trying to protect their lien for a property that will not allow them to recoup that investment plus their initial investment on the loan. On the other hand, if there a property with FMV (Fair Market Value) of $150K. A 1st for $90K and a 2nd for $60K, count on the 2nd bidding at the auction to protect their interest in this property. It is never a good idea for a lender to throw away good money at a losing proposition. Good luck!
Often the second is small enough that the company wouldn't want to fiil with it in any case. THey are after all in the business of lending money and not foreclosing, rehabbing and selling for a profit.
[addsig]
But is it correct that the 2 nd note holder has less protection than others?
If owners have a judgement against them for a medical bill ,mechanics lien or water bill this lein is not wiped out with foreclosure and this is one of the reasons why you need a title search before bidding at auction?
Thanks
What happens to the 1st mortgage on a property when a 2nd mortgage is foreclosed on and the home is sold at auction to cover the debt on the 2nd mortgage?
Thanks,
MemphisREI[ Edited by MemphisREI on Date 11/27/2004 ]
Ray:
In California all junior liens are wiped-off the property. I prefer wiped-off to wiped-out because it implies the debt is still owed just not attached to the property. Auction proceeds are paid in order of priority (purchase money loans then all other liens in order of recordation at the county recorders office). The IRS has that special distinction of having a 120-day right of redemption.
Each lien has it's own equity position. Consider a $100K FMV, $50K 1st loan, $20K 2nd loan, and $30K IRS tax lien. The 1st has $50K, 2nd has $30K, and the IRS lien has $0K equity positions. Now if properties are currently going for at least 80% of FMV at auction then the 2nd is actually a pretty safe bet because the 1st + 2nd only equal 70% LTV which means there is a high probability the 2nd will get cashed-out. The 2nd just has to be willing to bid the 1st + 2nd at sale to guarantee their money. The IRS will likely receive at least $10K of their money, not that they would know that.
Memphis:
The winning bidder takes title subject-to the senior liens meaning that the previous owner is still on the loan docs but the new owner is responsible for making the payments.
The respect a Trustee's Deed carries with it virtually ensures senior lenders will not call their loans due even though they could. The winning bidder will also be responsible for making backpayments and paying legal costs of the senior liens to prevent them from foreclosing also.