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superior liens during foreclosure?What happens to superior liens
during foreclosure?
I will reprint the question before answering
What happens to superior liens like state income tax liens and a
real estate tax liens when the first mortgage company
forecloses?
My answer:
Superior Liens & Foreclosure
First read our definition of mortgage lien. The article below
will help decipher the difference between mortgage liens and other
types of liens and how they are get treated during the foreclosure
process.
Note:Read Our Top Five Mortgage Complaints!
I know this can get exhaustingbut stay with me. When it comes to
understanding how liens are satisfied or expired (re. wiped out) at
foreclosure, you must understand the rules on how liens are ranked
by time (ie. when they occurredwhich came before another) to
determine superiority and the exceptions to the rules.
Most exceptions are created by state statutes which allow this
ranking system to be superseded by certain types of liens.
State income tax liens, as well as county real estate tax liens
and liens for homeowners association dues in the case of condos,
are all superior in lien position to the first mortgage regardless
of when they occurred. So the normal when they attached to the
property rules don't apply with these types of liens.
Mechanics liens or liens for any repairs or construction work
performed on the property also are not time sensitive either.
(You'll want to check your state law to see what type of liens in
your state take superior position regardless of when the lien
occurred.)
These statutory time ignoring rank jumpers all go to the head of
the line when it comes to satisfaction during a foreclosure
action.
This means the first mortgage company foreclosing will include
those amounts in their bid offer at the court house steps along
with their mortgage balance and foreclosure costs in order to
obtain clean title at the foreclosure auction. For example, let's
say the first mortgage company is foreclosing on a $200,000 loan
balance which includes the actual balance at the time of default,
all the added foreclosure costs, so normally they'd show up at the
auction and bid the $200,000.
But in the pre-auction title search, the bank determined there
was an outstanding superior mechanics liens for $6,000 attached to
the property. The lender would then bid $206,000 at the auction
with the notion that they will pay the mechanics lien off so when
they go to re-sell the home, this lien will not stand in the way of
them transferring merchantable title.
One caveat is in order here. This is the way the banks handled
superior liens before the foreclosure crisis. Now that we are in
the middle of the biggest wave of foreclosures in history, not all
of the banks are handling liens in this former straight forward
manner.
Some banks now are not taking responsibility of senior liens at
auction time preferring to make it the problem of the buyer of
their REO home believing most of those buyers are smart enough to
cover their butt during the auction or subsequent re-selling phase.
So watch out for outstanding liens if you are thinking of buyer an
REO home from a bank or bidding on one at the auction.
Inferior Liens & Foreclosure
Any inferior or subordinate lien positions like IRS liens and a
second mortgages, liens placed after the first mortgage lien was
put in place, are wiped out at the foreclosure auction.
One thing I believe you can count on is even if the superior
liens are not paid inside the foreclosure actionthey are still live
after the foreclosure. If the bank or the new REO buyer covered
your liens they have a cause of action against you and can seek
repayment in other ways (ie. attaching bank accounts or other real
estate owned). The same goes for inferior liens as the lien is an
attempt to get paid during the transfer of the property. Just
because this attempt fails, doesn't extinguish the creditors right
to seek repayment another way.
I am not a real estate attorney, so don't take this as legal
advice. Hire an attorney to review your case and your state
statutes to get actionable information.
Here is a quick video by a title industry professional about the
different types of liens and how they get treated in
foreclosure.
Thanks for the question.
Hope I shed some light on how liens are placed and subsequently
satisfied or eliminated as well. For more, see Glossary
TermSubordination.
Good Luck!
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Author: The Mortgage Insider
What happens to superior liens during foreclosure? was last
modified: July 24th, 2015 by The Mortgage Insider
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