Often in California real estate nonjudicial foreclosures (trustee sales), it is not the first lender that is foreclosing, but the second deed of trust. Concerning priorities: the “first” is the first deed of trust to be recorded, and is usually the purchase money loan, or a refinance. The first is usually the biggest loan against the property. If there is sufficient equity in the property, there may be a 2nd, and a 3rd. For the rest of this post, I will call the first the “senior lien”, and the second the “junior lien.”
In residential properties, the junior is usually an equity line, for a much lower amount then the second. If the junior is the foreclosing lender, the trustee’s sale wipes out any liens recorded after the junior was recorded, but does not affect the senior lien. The buyer at the sale steps into the shoes of the junior lender- and is subject to the senior lien. That means the buyer must pay the senior, and is subject to the terms of the senior note and deed of trust.
1. Due On Sale. The senior lien probably has a “due on sale,” or acceleration clause. That means that if there is a transfer of any interest in the property, including a foreclosure or trustee’s sale, the senior has the option to accelerate the loan- declare the full balance due. The lender notifies the owner of the property of the decision to accelerate and if the loan is not paid in full, there is a default, and the lender can begin the foreclosure process.
2. Modification of the Senior Lien. Sometimes the senior lien is modified after the 2nd deed of trust is recorded. If so, whether the modification is wiped out by the foreclosure depends on several factors. If there are variable terms in the senior, such as a variable interest rate, they are not modifications. If a modification can seriously impact the junior by increasing the chance of default, the change itself or possibly the entire senior lien can lose priority and become junior, in which case the junior is not subject to them.
3. Additional Advances. If the lender advances additional money after the deed of trust is recorded, the key is whether the advance was optional, or whether the lender was obligated to make them. For example, the senior lien is a line of credit for $100,000. The borrower paid the balance down to $50,000 after the junior lien recorded. The lender then loaned another $30,000, still under the limit of the line of credit. That was not optional; the lender was obligated to lend up to $100,000 total, so the additional $30,000 remains senior to the junior lien. However, If the balance was at $100,000, and the senior lender modified the contract to lend another $30,000, the additional $30k does not have priority, and the junior lien is not subject to it.
These are just a few of the considerations involved in buying at a trustee’s sale called by a junior lien holder, and why potential buyers should consult with an experienced Sacramento and Placer Co. real estate lawyer. If the buyer can handle the senior loan, and has a full understanding of the circumstances (and the status of title), it might be a good deal.