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Resources - Foreclosure

Foreclosure Overview

This is a general overview of foreclosures. Each state has its own laws, rules and regulations regarding foreclosures. Please check with your local and state government agencies for more information. Do not substitute this information for professional or legal advice.

    1. Trustor—person who is responsible for paying back the loan.
    2. Trustee—3rd party who is responsible for overseeing compliance on all the conditions of the loan. He only takes action in response to a default of the loan.
    3. Beneficiary—the lender.
    4. Senior loan/lien—the loan/lien that holds first position in the repayment of loans. This loan has precedence in the event of a foreclosure action. The senior loan is the first loan recorded and filed with the county recorder. The loan may be referred to as a note/trust deed/mortgage, depending on the state.
    5. Secondary loan/lien—a secondary loan/lien gets paid off after the senior loan.

The beneficiary who gave the lending institution the funds for the property loan bears the risk of the trustor defaulting. If the trustor defaults on his loan agreement, the trustee forecloses on the trustor’s property. Ninety days of grace are usually given in most states, until the notices of sale. A further three weeks to remit the deficiencies is granted after the notice of trustee’s sale is recorded. In most states, if a trustor is in default, the trustee has to give notice to the property owner, post a sign at the property, and publish the notice in a local paper. The trustor then has 90 days to bring the loan current and make up the back payments and penalties. If he doesn’t pay after 90 days, a notice of trustee sale is filed. After 90 days, the trustor may be required to remit the face value of the note, plus any costs incurred during the delinquency. This is at the discretion of the beneficiary.

When the auction is held, the buyer must check the county records to make certain which note is offered for sale. To take title to the property, he would purchase, at the sale, note being offered. The purchase of the note is the only necessary legal title that the buyer will need to record ownership of the property. If it is a junior note, the buyer must service any senior notes, liens, and delinquencies, including property taxes and possibly IRS liens.

If the funds from the sale are equal to the balance of the loan, then all the junior note holders and people with liens junior to the note being sold will have no claim to the property.

If the funds from the sale exceed the note, then the secondary notes are paid back on a historical basis determined by when the loans/liens were recorded at the county recorder. However, the IRS has the option of enforcing their rights usually up to one year after the sale. They would acquire the property and sell it, hopefully at a profit, to satisfy their liens.

If there is any money left after all of the notes/loans are paid off, then the remaining balance goes to the trustor. (This rarely happens.)

It is worth noting that it is of utmost importance to know the position of the note going to sale. This can only be determined by the date stamp on the instrument at the county recorder’s office. Any subordination agreements must also be considered. It would be a major mistake to bid on a note at trustee’s sale, only to find out it is junior to another you were unaware of. As the new property owner, you would be responsible to make payments on that note, or perhaps, if the Notice of Trustee’s Sale were published, be required to pay the entire amount of the note, past-due interest, expenses and principal.

Buying and selling seconds in the market is a business in itself. A company buys seconds at a discount from the outstanding balance of the note. If an investor believes that his secondary note will be paid off at the foreclosure auction with an overbid, he will try to buy the second from the beneficiary at a discount. The beneficiary, in many cases does not want to inventory the property and/or take the risk of loosing the entire amount of the note at auction due to a senior note going to sale. Beneficiaries often sell the second lien at a discount, and even at a loss.

Investors who are confident that a property will receive funds sufficient to satisfy the second lien at the trustee sale can make money, but also take on a high amount of risk. If you are interested in this type of investing, you must be absolutely sure of the position of the note; do extensive research of the public records, and attempt to determine a quick-sale value of the property.

Typical Loan positioning
1. IRS lien
2. 1st position—home loan
3. 2nd position—home equity loans
4. Mechanic’s liens

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