Where does HELOC stand in the order of lien priority?

Question

We bought a property through county auction. There was a HELOC mortgage put on the property years ago and the property has been transferred 3 times since that HELOC. Obviously our title search did not find it prior to us biding and winning it. Now I just felt it is a ticking bomb waiting down the road for me. This foreclosure was a HOA foreclosure and the primary loan mortgage already has a release on it. So there is a lot of surplus fund left after the HOA took only a small portion. The HELOC bank had never record any liens, lis pendens on the subsequent owners over the 16 years period after the HELOC mortgage recorded.

Can you please help analyze my situation. I was told the primary mortgage is considered superior lien and cannot file for surplus fund. Is HELOC mortgage considered the same and cannot file for the surplus fund? Should I notify the HELOC bank to ask them to go after the surplus fund from the auction? The auction just happened this week, so should have enough time?

I am also puzzled by why the bank did not do anything in the past 16 years. Could it be the original HELOC borrower secured the line of credit but never took the money?

Thank you in advance.

Kevin Sobilo · Answer

@Matt James, Voluntary liens like mortgage loans and HELOCs are in time order. The oldest one recorded is in first position. Unless the lien-holders agree in writing to change that which would be rare.

The HELOC must have a lien otherwise you wouldn't know about it at all.

My guess is that they never used the HELOC and eventually it was closed BUT that no satisfaction document was recorded to show the lien was cleared. That does happen sometimes. I would contact the lender.

I would imagine if the lender isn't helpful or maybe doesn't exist or was bought out or whatever that it could be cleared up with a quiet title action.

Tom Gimer · Answer

@David Cheng If a lien is not recorded, it is not perfected (except for water, RE taxes, condo/HOA, and other liens which arise by operation of local law). Would-be buyers do not have constructive notice of unrecorded liens so they are unenforceable against purchasers for value.

You either need to learn how to run title yourself or pay an examiner to do so before you bid. And it better be a good examiner. The damages on a crap title report are often limited to what you paid for it. Read the fine print.

If it turns out there is a superior lien on title, it will become a special exception in the final title insurance policy (if you can even obtain title insurance in your jurisdiction on a sheriff's sale or foreclosure... this is not always the case). You cannot get title insurance before you bid so the comments above are not helpful.

Tom Gimer · Answer

@David Cheng Hahaha… I’m an attorney but I’m not your attorney and this isn’t legal advice so we’re good.

It really depends where the property is located but I would be sure to be researching the following wherever these types of records are found:

Land records (liens and priority, HOA/COA, restrictions), court records (judgment liens/pending litigation), RE tax history, water history, local laws on super-priority liens, BK.

Tom Gimer · Answer

Superior lien holders typically are not parties to a junior lien foreclosure action. They are not entitled to surplus as their lien is not affected by the foreclosure. That surplus should flow downhill.

I would certainly not notify the HELOC lien holder of this situation as that could wake a sleeping creditor and create a new foreclosure action with you as the defendant. That old lien will eventually expire. Let it.

David Cheng · Answer

Very Solid Points. I'm going to price out the Title insurance in the next few days. Thanks much!

David M. · Answer

@David Cheng

Not entirely sure since I don't buy from auctions. However, my understanding is that you can still obtain Title Insurance. Even more so than a regular transaction, if that's possible, it really is on the buyer/bidder to do their due diligence. Sure, the sheriff sale doesn't provide Title Insurance, but neither does the seller in a regular transaction. You need to do your own Title search buy Title Insurance to go with it.

David Cheng · Answer

@David M.I was under the impression that county foreclosure auction properties do not have Title Insurance before I bid and buy it, am I wrong?

David M. · Answer

@David Cheng

Thats kinda why you get Title Insurance... This way you don't have to be a professional Title searcher, and the Title company/insurance will cover any defects. Otherwise, you would need to search other localities/areas. For example, I THINK federal liens, e.g. if you didn't pay your income taxes, are filed in a federal court/database. Sure, you can search anything/anywhere you want, but do you want to make it your job?

David Cheng · Answer

@Tom Gimer, @Kevin SobiloIs there any way to prevent @Matt James' predicament in the future?

If I go to the county records and see there are no liens on the lot, are there other actionable loans/liens that are not filed with the county property records? If so is there a way to find them?

Where does HELOC stand in the order of lien priority?

Where does HELOC stand in the order of lien priority?

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