borrower owned only 50% of property, foreclosed, now what?

While researching a Nevada property I wanted to buy at auction, I found a discrepancy in the chain of title. As far as I can tell, the borrower only owned 50% of the property when he took out the loan. The Deed of Trust names the entire property as security. I didn’t bid and it went back to the bank. I’m wondering what happens now and what I would have owned if I had bid.

The chain of title looked like this:

– husband and wife owned property as community property
– wife died
– wife’s will directed her 50% into a Living Trust, her estate recorded deed to that effect
– husband wrote QCL deed to put his 50% into same Living Trust
– now the Living Trust owns 100%

Later it appears two subtrusts (A/B trust for Survivor Trust and Credit Trust) were created.
– Living Trust records QCL deed to put 50% into Survivor subtrust
– Living Trust records QCL deed to put 50% into Credit subtrust
– now each subtrust owns 50%

Then the husband wanted a cash-out loan. He recorded the following deeds:
– Survivor subtrust grants all its interest in property to husband (now he owns 50%)
– Living trust grants to husband all its interest in property (which is nothing I think) to husband (he still owns only 50%): probably this was an administrative error and the intent was to have the Credit subtrust grant its 50%
– it seems to me that Credit subtrust still owns its 50%

At this point there is a Deed of Trust recorded with the husband as borrower, and the entire property as security.

Recently the lender foreclosed and the property went to the beneficiary.

What is the bank’s situation?

What would have happened if a 3rd party bought the property at auction?

Without looking at any of the documentation and assuming the lender is an institutional lender then they undoubtedly required the homeowner to purchase a lenders title policy. This insures the lender that they are making a loan secured by the property in the lien position outlined in their lender instructions. That policy should protect them from any issues surrounding lien position, questionable title or defective deed transfers. It sound like there may be some curative title work and potentially a title claim against the lender policy. If you purchased the property as a 3rd party investor you would not have the benefit of the title insurance policy and you would need to address the title issues and work on clearing the title and finding a title company that will insure the transaction.
Keep in mind that there are few lenders that would lend to a trust. Most required the homeowner to transfer title out of trust and then once the loan was recorded they could put the property back into trust. There are some lenders that would lend to a trust but require that the trustees signed as individuals and as trustees. In that case the point is moot since he is signing on behalf of the trust and as an individual.
If you were to go back in time and consider purchasing this property at trustee sale you would want to take this chain of title to a title officer at your local title company and see if they would consider this insurable title. You may also want to see which title company handled the escrow when the loan was taken out and go back to that company since they would have insured that transaction and would have the complete file.

Thanks for the informative response! I am still interested in the property and plan to keep an eye on it. I am guessing the lender will correct whatever problem exists with the title and then list it as an REO. The Deed of Trust has a clause saying the borrower warrants that he can deliver the property, so they might be able to invoke this and – since the borrower is also the trustee of the trust with 50% share – it is in his power to fix it.

On occasion there is curative title work that needs to be done prior to the bank listing or selling a property. If you buy the property from the bank you will go through the normal escrow process and purchase an owners title policy.