If a 2nd lien forecloses and it sells for higher than the total debt, where does the extra money go to? ?Does it go to pay down the first or does it go to the Owner? ? This is regarding trustee sales in California.
If someone buys the 2nd (junior) deed of trust at a trustee sale, they (after recording the trustee’s deed) become the new owner … BUT in order to gain clear title, in virtually all such cases, they would need to pay off the senior (1st) lien-holder(s) in full **… or make a deal with a generous 1st lien-holder who is willing (they could DEMAD full payoff) to allow you to bring the loan current and make ongoing payments.?For the 2nd DOT to “get bid up” over the “published bid” (full debt owed), there would have to be equity left in the property after paying off all senior debt. A bidding war on a 2nd, **above full debt, happens on occasion, but it is not that common.?
That said … IF you pay more that “full debt” via a steps bidding war on a 2nd, the trustee/lender are not entitled to keep the “overage” and any excess $$ over the full debt would go to the first in line (senior by recording date or subordination agreement) mortgage holder. So the 1st would get paid the “excess” and then come looking for the investor who bought the 2nd and likely demand a full payoff of the remaining amount due on the senior loan.
There are rare instances when bidding on a loan goes above all recorded debt due. In such cases the ex-homeowner is entitled to the “overage.”
This is what I initially thought as well. However, I was informed by a VERY experienced investor that if the sale of the 2nd is over the full debt (of the 2nd), the excess funds goes back to the owner NOT the 1st. If the 1st is sold over the full debt (of the 1st) then the excess goes to pay off the 2nd. Basically if the lien sells at above the full debt the excess goes to subordinate lien NOT senior liens then to the owner. At first this didn’t make any sense to me but after thinking about it a little, it kind of has some logic to it. The reason why excess funds goes to pay subordinate lien is because they are extinguished and loose their right to act (foreclose). The senior liens still have that right. Has anyone had any real experience with this and could definitively say it is one way or the other?
Tim, point well made and supported by logic. Glad to be corrected. And 1st could demand immediate full payoff from new owner (party who bought the 2nd) or foreclose themselves. Now to muddy up the waters a bit further. What if there were other lein-holders that were not covered by deed of trust (e.g. abstract judgement payable to a credit card company) but were also senior by recording date to the 2nd which foreclosed. Since they don’t have the power of foreclosure, would they be left ‘holding the bag’ when the property owner loses his/her house at trustee sale via 2nd DOT foreclosing with a bid that exceeded full debt due on that loan??
I’ll answer my own question … they too could look to the new owner (buyer of the 2nd) for their payday … as they were senior by recording date, and if necessary (if they don’t get paid) they can maintain their lien against the property thereby clouding title.