Transcript Real Estate Coalition Update and Action Plan

Coalition Corner:
Business training tools for HR staff, real estate licensees and other
service professionals in the relocation and real estate industries
Lien Priorities in Foreclosure
Richard H. Mansfield, Worldwide ERC®/Coalition General Counsel,
Mansfield & Associates
© 2008, Worldwide ERC® Coalition
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Program objectives
• This program supplements an editorial feature in
Worldwide ERC®’s Mobility magazine
• This segment will:
– Introduce users to some basic facts about real
estate foreclosure
– Review information on priorities when more than
one lien holder has an interest in foreclosed
property
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Introduction
•
Current economic, housing market and mortgage industry challenges are
giving rise to growing numbers of lender foreclosures, short sales, and
REO sales
•
While foreclosures are still relatively rare in relocation, short sales and
deeds in lieu of foreclosure are becoming more common
•
In short sales/deeds in lieu, payment of lenders and other recorded
encumbrances are generally negotiated as part of the transaction and/or
satisfied before transfer
•
In foreclosure, rights of lien holders become more complicated, particularly
since there is often no equity in the property
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Overview of the Process
• Home purchase and foreclosure proceedings vary
from state to state in detail, but are similar in the
broadest sense:
• In a simple house purchase…
– When buyer goes to settlement, lender sends loan proceeds
to pay part of the sales price/transaction costs
– Buyer signs note/evidence of loan and documentation
giving lender rights if note/loan is not paid according to
specified terms
– Mortgage document is often referred to as “purchase money
deed of trust” or “purchase money mortgage deed”
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Overview of the Process
• In a simple house purchase (continued)…
– At settlement, closing agent records mortgage with county clerk
immediately following deed from seller to new buyer
– In the absence of any liens not removed/satisfied before sale,
property is owned of record by buyer, and subject to the mortgage
to the purchase money lender
– In event buyer defaults, lender can take property back through
foreclosure, sell it, pay itself the balance of the note and costs and
give the remaining amount, if any, to the buyer
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In the Event of Foreclosure…
•
Important to remember mechanics of foreclosure are complicated, and
can vary by state law and mortgage terms
•
Two types of foreclosure:
– Trustee Sales – Pursuant to the terms of the deed of trust, and after
notice, the trustee auctions off property (often at county courthouse)
– Judicial Sales – Formal court hearing in which judge orders property
sold/proceeds distributed
•
Both types have same end result: property is sold; proceeds
distributed to lien holders to secure loans or obligations of original
buyer
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If More Than One Lien Holder Exists…
•
Typically, purchase money mortgage is first lien filed on property
•
In many cases, there are other liens, including home equity loans or lines
of credit, second, or sometimes even third or more mortgages
•
In some cases, homeowner dues, assessments or association fees
(particularly with condos and PUDs) may also attach
•
If construction was done on the home, there may be mechanics’ liens
•
There may be federal or state liens placed on the property for unpaid
taxes
•
Further complications occur if, as in the vast majority of foreclosures,
proceeds of sale are insufficient to pay off all recorded liens
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How Shortfalls Are Resolved
• Determining who gets what portion of the proceeds requires
analysis of the “priority” of recorded liens
• Generally, each lien is paid off in full as its priority arises
• If proceeds are insufficient, liens with lower priority get nothing
and are “extinguished,” (i.e., no longer apply), which enables
foreclosure buyer to obtain property free of liens in most
circumstances
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Determining Priorities (Non-Government Liens)
• The general rule is “priority in time is priority in right” – or lien
recorded first has priority over those that follow
• Why purchase money mortgages are typically filed first
• Generally, non-government liens tend to most closely fit above
rule, as subordination clauses are not common in residential
mortgages
• Nuances and exceptions to consider:
– Homeowner dues/assessments treated differently by states, but
generally (in all but 13 and D.C.) general rule applies
– In other states, lien for unpaid dues/assessments automatically
attach when amounts are late; can be un-filed and afforded “superpriority lien status,” thus jumping to font of line (although amount is
often limited to six months’ arrears)
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Determining Priorities (Non-Government Liens)
– Mechanics’ liens are often subject to a jump in priority as in
most states, their priority relates back to start of
construction or date of contract
– Some construction contracts (such as architects’) begin
long before construction; sometimes bumping mechanics’
liens to front priority
– However, mechanics’ liens can be subject to time limits;
usually six months
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Determining Priorities (Government Liens)
• Government liens fall into two categories: federal and state
• Federal tax liens are most common type; follow general rule as to
priority, but have special rules regarding foreclosure:
– Unless District Director of IRS is given statutory notice 25 days prior
to a foreclosure sale, the lien is not extinguished by the sale; thus
surviving it
– If proper notice is given, lien is extinguished in same way as private
liens
– However, although it does not generally occur in most foreclosures,
the IRS has a theoretical “right of redemption” for 120 days following
sale – meaning in theory, it could tender the sale price and buy the
property from the foreclosure purchaser
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Determining Priorities (Government Liens)
• Federal gift/estate taxes:
– Often called “silent liens” because they attach to all
decedent’s or donor’s property at date of death or gift
– Usually not recorded, but are still valid against property
– Upon proper notice and subject to IRS redemption rights,
can also be extinguished
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Determining Priorities (Government Liens)
• State liens:
– Can arise from variety of unpaid obligations, most common of which
are real estate taxes and assessments
– State property taxes (including county, municipal and local and/or
special taxing districts) generally attach at the first of each year and
are not typically recorded
– Given automatic priority over other liens, thus making unpaid
property taxes superior to other liens
– About 32 states will sell liens in form of state tax lien certificate;
giving purchaser right to collect tax by foreclosure if necessary
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Other Information Relocation Professionals
Should Know
• Do unsatisfied lien holders have a right to file against delinquent
homeowner?
– Answer varies by type of lien and lien document
– Generally, absent a “non-recourse” agreement, lien holders are free
to proceed against individuals, except in some homestead states
(such as CA, TX), at least with respect to mortgages for primary
residences
– Numerous variations and subtleties – accurate answers require
much more detailed analysis of individual situation, lien and state
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In Conclusion…
• Proceeds from a foreclosure sale must be used to pay off liens,
most of which are recorded, prior to any proceeds going to
involuntary seller
• First recorded liens generally paid first
• If proceeds run out, inferior (later recorded) liens generally
extinguished; holders do not receive proceeds from sale
• State tax liens get highest priority (even though generally not
recorded)
• As long as proper procedures and notifications are followed, the
process is otherwise orderly and chronological with respect to
recorded liens
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