REO Question
I am uncertain about something concerning REO properties and the role of the lending bank when the property is auctioned. First of all why does the lending bank, the bank who granted the original loan for the purchase of the property have to bid on it like anyone else would? Secondly, If all other mortgages beyond the first are basically erased at foreclosure, and lenders know that, why are there such things as second, third, etc.... mortgages? What's in it for the lenders who do them if they just lose out on the very property they have their lein upon?
Thanks for any clarification. 
[addsig]
Actually things are not as you may think. The lenders are paid off in their respective order. e.g. First first, Second second, etc. Taxes of various kinds can slide into various positions as well. If there's any money left over after auction, it can even go back to the person being foreclosed upon. Not that that happens a lot. Looked at in that light, seconds and thirds, etc. make sense....
Cheers,
Jeff
First, about bidding. Whether bidding is opened at $5.00 or $500,000, once the opening bid is placed it can only go up from there, it cannot go down. In order for the lender to assure that every bid placed will be sufficient to repay the defaulted note, the foreclosing lender (or trustee) is allowed to make a credit bid for the amount owed. Since the lender already has that precise amount lent out, they are credited with that amount at auction so they do not really pay anything more to take the house should no one else bid. However, anyone who does bid must bid a higher amount and so covers the entire debt.
Second, why there are junior mortgages. You already have a partial answer from Jeff...that any overbid is applied to junior liens (with the borrower last in line) in a pro tanto fashion until overbid funds are exhausted. But also, in every jurisdiction I have come across, junior bene's are allowed to secure their interest by reinstating a senior, foreclosing lien and then pursue their own foreclosure. Lastly, it isn't necessarily always the first that forecloses. Sometimes a second or third will bring a foreclosure action more swiftly than a senior (if the senior is even in default).
Also, keep in mind that juniors aren't necessarily "erased" at foreclosure. They are wiped off of title, but that does not mean they are wiped out by the foreclosure. Only bankruptcy can wipe them out. Foreclosure just makes it so that the juniors can no longer claim the property as security for the debts owed to them. They are free to pursue collection in any other lawful fashion other than to bring foreclosure for the same property.
Does that make sense?