trustee sale question

[Patrick McGowen]

Say there is a property up for trustee sale auction, being foreclosed on by the first mortgage company.  The minimum bid is for the total of this first mortgage.  The title search revealed two other liens.  The title company organizing the auction informed the first mortgage of the other liens.   The title company cannot give any title insurance or guarantee of clear title after sale (typical of trustee auctions), but says that the foreclosing mortgage company was informed of these secondary liens and should have informed the second lien holders of the auction.  If the secondary liens were properly informed and the winning bid does not cover them they go away and title is cleared of them (is this correct).  Basically we are relying on the bank to do the right paperwork, no problem (yikes).  

Also say, totally hypothetically, that the auction is coming up soon so there isn't much time and there is an investor that doesn't really know what he is doing, but might be just dumb enough to bid on it.  The second lien holders won't give this poor investor the time of day unless he has some documented ownership or role in the property.  

So what advice would you give this investor.  Is his understanding correct, that the second liens go away as long as they were informed of auction?  If they were informed, but the primary mortgage messed up some detail of the paperwork, how likely is the second lien holder to come after the money (say second is around $15 or 20k).  

[David Mitchell]

This is a great question and unfortunately the answer is "it depends".  I'm curious what types of liens were these two additional liens?  There are some types of liens that may not be extinguished after a foreclosure even if the foreclosing entity was the 1st mortgage.  Some possible examples are: environmental liens, municipal liens, tax liens, etc. 

However, with some exceptions, generally lower level priority liens will be extinguished through the foreclosure process.