Line of credit caused foreclosure, does older mortgage survive?

Question

Hello BP,

I am a new investor in NC. I have been following a run down property I knew was headed to foreclosure for a few months.  I had an attorney do a title search and he determined that it was a $25k line of credit that originated December 2012 that caused the foreclosure.  However, there is an unsatisfied mortgage for $100k originated June 2006, and the remaining balance is unknown.

The property "sold" on the courthouse steps this week for only $3000.  My attorney advised that whoever buys the house at auction will be liable for the remainder of the older $100k mortgage.  But I cannot find any case of this in my research and every investor I ask says that foreclosure eliminates all debt, with the exception of taxes.

I am confused and cannot get the attorney to call me back to clarify.  Anyone have any experience with a case like this?  I think the house could flip for close to $200k, so getting it free and clear for close to $3k seems too good to be true...?

Thanks,

Matt

Ivan Vargas · Answer

That still sounds like a steal to me. Even if the bid reaches 10k, add the 100k you're in it for $110k plus rehab cost for a $200k ARV.

If you buy at the junior lien auction the superior lien(s) are not affected. Also any lien junior to that lien that was foreclosed, if it was not named a defendant in that foreclosure case, it survived the sale! Big risk but you already did a lien search so you should know about all liens. Taxes, utilities, construction or city liens etc...

The lender that holds the first mortgage will not discuss the loan with you. In fact it might already be in foreclosure. If not, as soon as they find out title passed they will call the loan due and file the foreclosure. They are however, obligated to provide a payoff statement to a successor in interest, whoever holds title. No curing the default or negotiating the balance, just a payoff.

Wayne Brooks · Answer

Yes it is too good to be true and your attorney is correct. It is very simple....a foreclosure Does wipe out all liens that are Junior, or behind, that mtg., but not those mtgs/liens Superior to the mtg foreclosing. The first mtg recorded is Superior to the mtg recorded later, and stays fully intact.

This is why someone only bid $3k

If the first mtg foreclosed then then the second mtg Would be wiped out, along with any other liens “junior” to the first mtg.

Tom Gimer · Answer

Senior liens survive foreclosure. Your attorney is right: it’s not free and clear. The foreclosure purchaser is taking title subject to the 2006 $100k... whatever the current balance is.

Matt W. · Answer

Chad, There is a 10 day upset bid period every time someone makes a higher bid. It’s actually been bid up 5 times in the past week so it is still up for grabs. I don’t know if the other bidders have any idea about the superior mortgage that will come with it.

Chad U. · Answer

I don't understand, if this property already sold to another bidder, why are you wasting your time chasing this?  If you are still interested in buying the property, contact the 3rd party bidder who bought at the foreclosure.  The only person who can get a payoff from a lender is the owner of the property, which is the person who bought it.

Matt W. · Answer

Thanks guys, I spoke to my attorney and the law firm handling the foreclosure and got basically the same answers.  Now the $100,000 question is how much of that mortgage balance remains?  I've spent hours on the phone with every department at WF Bank and they acknowledge the loan exists but won't tell me if they plan any action to collect it after the property sells or what the balance is.  I've been trying to scoop this place before it went to foreclosure and the older lady owner is long gone and moved away and I cannot track down her or any of her children.

My attorney says it might not be a problem until I try to sell or refinance and someone does a title search and sees this unsatisfied lien and will not loan against the property, which is a problem as I plan to BRRRR it.

Any tips on how I can find out that balance?  Thanks again!

Line of credit caused foreclosure, does older mortgage survive?

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