Bank bidding up price at Auction if they own the first and second lien?


#1

If there are two loans from the same bank on a property, can the bank come to the auction and bid up the amount to cover their second loan? Specifically, there is a property with two loans with the same bank. Both loans are in default and scheduled for auction. The loan in the first lien position is scheduled for auction first. Can and will the bank come to the auction and bid up the amount at auction to cover their second loan?


#2

A bank would typically credit bid to a maximum of what is owed on the foreclosing loan. If they wanted to protect the interest of the 2nd they would foreclose on the 2nd and not the 1st.
The bank can come and bid above the opening bid just like any 2nd lien holder can bid at auction but they would need to have a representative show up. Although possible it is unlikely. Keep in mind that although the loans both show the same lender there may be different investors attached to each loan which may be the reason why both loans are in foreclosure.
Additionally the 2nd could cure the 1st and then foreclose on their 2nd.


#3

Thank you for your feedback Michelle. I have been at auctions when a bank representative is there to protect their 2nd lien position, however it was always a different bank then the loan that was foreclosing. Is that just a coincidence that I haven’t seen the same bank? On this particular property, every time the 1st loan auction date has been postponed the 2nd loan auction date was postponed after a week. Clearly they seem to want the 1st loan to go to auction 1st. Of course, I hope that means something good for me? What are your thoughts?


#4

Also Michelle, could you explain how foreclosing on the 2nd before the 1st would protect the bank?


#5

If the bank held both positions and wanted to protect the 2nd they would foreclose on that position. The first would still be intact and if any 3rd party investor purchased the 2nd at auction they would still need to pay the 1st.


#6

It is really hard to tell what will happen in this case. Since there is no way to tell if there are different investors on the loans serviced by the same bank it is really hard to speculate on what may happen. It sounds like it is worth tracking.


#7

Thank you Michelle! I’ll let you know it turns out!


#8

You might also check the trustee on each loan. Regardless if the lender appears to be the same bank, if the trustees are different, it’s possible the loans were sold (packaged into a CDO for resale into secondary market) off to different investors with differing interests (many bank mergers/takeovers in the wake of the 2008 financial crisis).


#9

Thank you Danny. As you suggest, I checked and their are different trustees for each loan. What does that mean for me?


#10

This would only mean that the loans are being handled by 2 different divisions. Most lenders have different departments that handle first mortgages and 2nds.


#11

I was at a recent auction where the 1st was foreclosing and opened bidding with a full debt bid (total loan amt + back due payments). There was still equity after that bid and a 3rd party jumped in with a “penny more” bid. Then the auctioneer followed with another bid on behalf of a 2nd lender on the property (protecting their position). The 2nd continued to bid until all equity was squeezed out and it sold to the 2nd lender. After the show was over, I asked the auctioneer about the fact that the 2nd was allowed to bid through the auctioneer. I thought that only the foreclosing lender was authorized to bid via the auctioneer conducting the sale (I’ve seen that happen plenty of times … low opening bid to entice interest followed by “bid up” from the same lender) … but according to the auctioneer, ANY lender with an interest (e.g. a 1st, 2nd or 3rd loan) on the property can “contract” to bid through the auctioneer (not just the foreclosing lender). He further explained that if the lender were acting simply as an investor (no direct loan tied to the property) they could still bid, but they would need to show up at the auction and bid directly … or hire a proxy steps bidder to do so on their behalf. I’ve also seen lenders who have hired other auctioneers (who were not on duty) to do their steps bidding.


#12

Although we don’t see it very often the foreclosing lender can do a low high bid and contract with the auctioneer to credit bid on their behalf. In this case the auctioneer gave you good information.