Loans Answers

2nd mortgage and bankruptcy

Question: I have located a property that is in foreclosure on the first mortgage. There was a second mortgage that was included in a bankruptcy last year. My question is, if I buy this house for the default amount, will I be responsible for the second mortgage, or is that now discharged, or somehow no longer a factor?

What is a reliable resource for getting questions like this answered, other than a lawyer?

Answer: I am a Realtor and a full-time investor in Ohio. I am not a lawyer and I am not and cannot give you legal advice. Now that my disclosures are all done this is what I have found to be true in these situations… If you buy the property from the homeowner in the preforeclosure phase (I am assuming that you are in a state where a property is auctioned at sheriff sale) then the second mortgage would still remain on the property. While the bankruptcy will save the current owner from having liablity to the second if the home is repo’d by the lender, this does not erase the lien from the home in preforeclosure phase. You can negotiate a short sale with the holder of the second mortgage in many cases, which might still allow you to make a profit on the home and build in some equity or at least more equity than already exists. Like I said I am not a lawyer but I do consulting on real estate investing. You should not rely on a ng for advice of this sort. But here is some general guidance.

1. When a first mortgagee repossesses a property and it is auctioned, it is generally sold free of liens (tax liens may be paid off or will be obvious in the sale).

2. A lien is said to be “under water” when the property value is less than the total of liens. The bankrupt will (absent fraud, bad faith, etc.) wipe out his/her liability on the debt. (If s/he reaffirms the debt, or otherwise keeps the house, under certain circumstances the mortgagee may benefit from the increase in value — but not if the property is sold. See #3 below.)

3. The stripping of liens can be quite complicated. Here are some cases on that: http://www.doney.net/cases/

4. Buying title insurance will assure you that you are getting what you are paying for.

5. County clerks are not lawyers and do not give legal advice. They should be able to give you a transcript of liens on property, but those liens may or may not be valid. Often liens (such as judicial liens) that are wiped out in bankruptcy remain on title for some time. In my experience, title insurance clerks know more than anybody else — in fact lawyers inevitably defer to them in states such as New York where the title insurer’s clerk more or less manages the real estate closing.

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