Which liens are not wiped out at the Trustee Sale ?
Submitted by TnMan2 on Mon, 05/26/2008 - 11:22pm.
If the 1st mortage lender is doing the foreclosure, exactly which liens are not wiped out? Is the winning bidder now responsible for paying them ? How soon do they have to be paid ? Is it possible that a lien gets recorded in between the time of a preliminary title report and the auction ? Would title insurance protect against such a case ? Sorry for asking many questions if you don't mind :-)
Comments:
Let me start by saying that there are some nuances that chief title officers still debate, but let me try to give you a framework to work from.
The basic concept underlying all of this is that when a lender makes a loan, secured by the property, they shouldn't become responsible for loans that occur later on. That simple rule frees the homeowner up to take additional loans without having to ask the earlier (or "senior") lenders for approval. In exchange later (or "junior") lenders understand that if the senior loan forecloses the senior lender is not responsible for insuring they are repaid.
The next thing to understand is that this pecking order is simply based on the order in which things are filed at the county, by date and document number. It really doesn't matter what the documents say - I have seen deeds of trust (the document recorded for a loan in CA) labeled as 2nd mortgages that were actually in 3rd position. The only thing that can change this order, is a subordination agreement - which essentially sets forth that a loan recorded earlier agrees to be junior to a loan recorded later.
Now a couple of additional things to note: property taxes are always senior. IRS liens that are junior are essentially wiped out but they have a right or redemption for 120 days (they can buy the home back from you for what you paid, without interest, or repayment of unnecessary repairs). Mechanics liens may have a claim if the repairs were necessary (the theory being that they were in the lenders best interest as they avoided further damage to the secured interest).
Now with those things in mind let's get to your questions. Senior loans (either though date or subordination) are NOT wiped out, and occaisionally mechanics liens (I've never had it happen personally) and the IRS has a right of redemption. The winning bidder isn't directly responsible for paying senior liens, but if they don't they will lose the home when those senior liens foreclose. Yes a lien may get recorded between the time you do your research and the sale - but it will almost always be junior so it doesn't really matter (I did see a lender record a subordination the day before the sale to try and sucker folks in at the auction - but it was clearly fraudulent and the sale was overturned). I'm not aware of any title insurance products for buyers at auction at this time.
Hope that helps.
Sean,
Thank you for your response to my question.
Have Great Day!
Billy
I am considering buying a partially completed home at a trustee sale. The title report states several significant liens by subcontractors that I am assuming are junior to the construction loan. Would I be responsible for paying these liens back if I were to purchase the property?
Wow Elizabeth, that is a very interesting case. I would assume it would wipe them out, but my understanding is that mechanics liens have been allowed to stand in certain circumstances if the work was considered to have benefited the lender. I would likely discuss this with a title company. Specifically ask if they would be willing to issue an owners policy after the sale, and if not why.
I have a lien on someone's property because they owe me money. How do I know if I am a "junior" or "senior" lien? and if I am junior and wiped out what is the point of my getting a lien in the first place if it doesn't hold true?
Hi Judy,
It is based on the concept of "first in time equals first in line". Each document recorded at the county has a date, and a document number. With just a few exceptions documents recorded earlier (lower date and document number) are senior, and one's recorded later are junior. Let's assume there is one mortgage senior to yours, with a outstanding balance of $400,000, and that your lien is for $25,000. If the loan senior to yours begins foreclosure you have some options. If your lien is in the form of a deed of trust you can likely begin foreclosure as well as typically any failure to pay senior debt is an automatic default. To protect your position you have the right to make the payments on the first until you can foreclose and take control of the property (at which time you may have to pay the first off as it likely has a "due-on-sale" clause). Alternatively you can let the first foreclose, attend the auction, and bid the first up at trustee sale until the winning bid is enough to cover your lien (the trustee on the first will pay out any excess proceeds to lien holders in order until funds are exhausted or all liens are paid at which point the remainder goes to the homeowner).
If the senior loan sells at foreclosure sale, for less than enough to cover your lien, and you FAIL TO PROTECT YOURSELF, then you are wiped out. Getting to have this option is the reason to file the lien.
What about HOA fees due? I assume they would be junior and would be wiped out. Am I correct to assume (generally speaking) that you would owe all back due property taxes, but be free of HOA dues if you buy at auction?
Yes, that is correct, but you may find it hard to get the escrow closed without paying back HOA fees. Problem is that despite the fact their lien is wiped out, the associations often fight you. While I think they would ultimately lose, it's sometimes more expedient to pay. In any case, you'll need to work it out with your title co, and don't leave it until the last minute.
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