Friday, August 27, 2010

Question from a reader on foreclosure, junior lien holders

(c) 2010 Benjamin D. Knaupp
Attorney at Law
Admitted in Oregon since 1997

Finally, I answer this question from a reader:

Mr. Knaupp,

Great foreclosure information. You cleared up a lot of gray areas for me in the foreclosure process. I have a question that I can not seem to find a clear answer for;

I understand that if a 1st (first) position lien holder forecloses it wipes out all other subordinate liens but, what happens if a 2nd (second) position mortgage foreclose? How are the proceeds of the sale handled? Who gets paid in what order? And, if no body bids at the auction does the 2nd position lien holder take the property and assume the first position debt?

ORS 86.765 is the closest statute I could find that addresses this question but, it does not specify which trust deed position should be paid first only that the, (2) "obligation secured by the trust deed" is to be paid, I'm assuming this refers to the forclosing lien holder, and then, (3) "all persons having recorded liens subsequent to the interest of the trustee in the trust deed as their interests may appear in the order of their priority." This sounds like the 2nd would get paid then the 3rd, 4th and so on because they are subsequent to the 2nd. Then the 1st must stay with the property?


ANSWER: Here are some answers to these questions:
1. A 2nd position lien holder also has a right to foreclose. However, there is a reason its best to be #1. A 2nd who forecloses eliminates any junior liens to his lien (such as a 3rd, etc.) but has no effect on the 1st. Therefore, a 2nd position lien holder gets nothing from a foreclosure sale unless there is sufficient equity existing in the property to draw bidders at sale, or if the 2nd lien holder wants to take over the borrower's legal title to the property and then pay off the 1st. In my experience with 2nds, this almost never happens because there isn't enough equity in most properties to make it worthwhile for the 2nd to foreclose on its lien.

2. If a foreclosure sale by a 2nd lien holder draws a third party purchaser at the sale, the cash generated by the sale goes first to the 2nd lien holder, and then to any other junior lien holders, and any excess goes to the borrower. Of course, this all has no effect on the 1st position lien holder, who still has a lien on the property which was not affected by the foreclosure sale by the 2nd. So the 2nd would have to come up with the total debt still owing to the 1st lien holder if the 2nd wants to keep the property.

I hope this clears up your questions.

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