Find balance on a senior position, open ended line of credit?

Question

I am looking at a house where the mortgage is in default and the sheriff sale is coming up. After the sale there will still be an open ended line of credit from the previous owner. The LOC is $25k and was originated in 1999. I would like to know what is owed on this.

Any thoughts. I am thinking there is no way of knowing but thought some of our venerable members could help.

Thanks.

Any thoughts.  I am thinking  there is no way of knowing but thought some of our venerable members could help.

Thanks.

Brian Burke · Answer

Back in the day, I used to estimate senior liens like that too, Rick.  If it appeared to be an amortizing loan I'd even run an amortization table to attempt to ballpark the principal.

But not anymore. I stopped doing that around 2009 because the foreclosure world changed then.  Prior to the crash, lenders would typically initiate foreclosure proceedings after the third missed payment and it was unusual if they hadn't started foreclosure proceedings by the sixth missed payment.  So if the loan wasn't in foreclosure it was a pretty safe bet to add six month's interest plus estimated late fees to the estimated unpaid principal.

But after the crash, I've seen many, many instances where loans have gone unpaid for years before foreclosure proceedings are begun.  I recently purchased a property at a Trustee's sale on a first deed of trust with an original amount in the $600K range, but the total unpaid balance had grown to well over $1 million!  I've seen that so many times that I have real difficulty bidding at Trustee's sales where there are senior deeds of trust.  It's just too risky when you have absolutely no idea what the senior debt has grown to and no way to find out.

Brian Burke · Answer

Account Closed what I'm saying is not that you can conclude that it was conveyed without encumbrances, but that there is a higher likelihood that the loan was paid off considering it was originated from a previous owner.  The new information that it was quitclaimed reduces that likelihood, and increases the risk.

Brian Burke · Answer

Account Closed if the LOC was originated by a previous owner, there is a chance that the lender or title company neglected to release or reconvey it when it was paid off. I see these a lot and sometimes I'll buy anyway and sometimes I won't. I look to see if the foreclosing loan was insured (look for a title company name and escrow number at the top) and if there have been multiple refinancings since the LOC was originated and whether those were insured.  I also look at the dollar amounts of refinances to see if they were high enough to have repaid all outstanding loans at the time.  There's risk in doing this so I don't recommend it for most people. I'm only comfortable because I've title searched many thousands of properties and bought many hundreds at auction.

Account Closed · Answer

@Brian Burke

That is excellent advice .  Doing that never occurred to me .    So what you're saying is if you see your mentioned indicators one can conclude that the property was truly conveyed without encumbrances.

As you might expect this property was quick claim deeded  from something like parents to child       That's really why I found it      If I see a normal warranty deed I only do a current owner  search

Account Closed · Answer

Thanks all.  Yes in this case the LOC was setup years before the defaulted mortgage.  Under a previous owner.  Good thing I did not limit myself to a current owner search on this one.

@Brian Burke   I agree.    I could live with the 25k still needing to be paid off.   I am concerned it has become something much larger.

So no way of knowing.

Tx all

Rick H. · Answer

All are originally right.

Typical scenario is that a 1st mortgage is followed by an equity-based 2nd mortgage securing the HELOC.

If buying at a foreclosure auction, sheriff or trustee sale, a 1st mortgage will wipe off (but not necessarily wipe "out") junior secured debts such as mortgages, deeds of trusts and judgments liens.

There are exceptions. Subordination agreements are a on the most common.

If you are buying at foreclosure auction, which is a liquidation sale, buyer must perform their own due diligent research to determine the lien position and other important collateral aspects prior to these typical all sale sales.

If the mortgage position you are bidding on us conformed to be junior to a HELOC, you can only estimate the loan balance (unless you have authorization from borrow to obtain actual beneficiary loan statement).

Most bidders will make an educated bet based on the HELOC credit being fully used, default interest rate in place and advances for taxes and forced placed insurance likely, too. This would be the conservative, worst-case estimate.

In the real world, bidders will often take informed (or blind, ignorant) risks based on their belief about market movement and other factors, as well.

Could prove a wild experience if you enjoy thrill rides and such. Either way, you'll learn something.

Ron S. · Answer

It won't matter what it is or was. There won't be an open ended line of credit after the sale, the LOC will be wiped out (Assuming it was originated after the foreclosing entity). If by chance the line of credit is in first position or senior to the foreclosing entity, it's going to survive the foreclosure and you might as well assume it's maxed out, and will have to pay it off to get clear title.

Brian Burke · Answer

There's no way of knowing.  It could be zero, or it could be significantly higher than the amount shown on the mortgage if the credit line was increased or they haven't made payments, resulting in accrued interest and penalties.  If the loan was in foreclosure you might find clues in the foreclosure documents, but just because it isn't in foreclosure doesn't mean that there aren't a ton of unpaid payments stacked up.

Find balance on a senior position, open ended line of credit?

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