Lien Position Isn't Always About Recording Date

[Mike Hartzog]

This quarter we are out in the market reviewing tapes, making offers, and generally working to add some additional NPNs to the portfolio.  I recently submitted a bid on a FL note with an original balance of 49K which was originated in 2007.  The current value of the collateral is in the 135K range.  My indicative bid was accepted to I ordered BPO and title report for the asset to do my final DD.  Looking at the title report I found that there was another lien in 2nd position for 196K.  Same lender, same borrower, and executed on the same day.  The recording date of the 196K loan was roughly 10 days after the recording date of the 49K loan.  Hmmm... 

It's pretty common to see a first lien originated with a particular LTV cap a smaller second lien originated at the same time with a higher rate. In this case, the 49K loan had a rate of 12.75%. I scrutinized the Mortgage document for the 49K loan and on page 2 I found the following text added to the document "THIS SECURITY INBSTRUMENT IS SUBORDINATE TO AN EXISTING FIRST LIEN(S) OF RECORD."

After seeing this I was pretty convinced that the intent of the lender was for the 49K loan to be a second position lien.  I sent the documents over to my attorney for review and he indicated, with no uncertainty, that I was looking at a 2nd lien.  He indicated that even though the state recognizes recording date for determining lien position (the common practice), subordination agreements are also recognized.  He told me in no uncertain terms that if this ended up in court with lien position in question, I would lose.

Decision made... its a no go.  While I was disappointed that the deal turned out the way it did, I am very happy not to have learned about this issue BEFORE making the purchase.   The seller, BTW, is reputable and was apparently not aware of the issue.  

I am curious if anyone else has run across this type of situation before.