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  1. #1

    Default Bidding on a Second Deed of Trust

    My question involves real estate located in the State of: California

    If I bid on and win a second deed of trust at a foreclosure auction what are my responsibilities when it comes to the first? My understanding is that I will then be subject to the terms of the first but what if the lender on the first deed of trust does not want me to to be their borrower, can the first then call the loan and force me to pay it off or face another foreclosure? Do I automatically, no matter what, have to pay off the first too?

  2. #2
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    Default Re: Bidding on a Second Deed of Trust

    The first can foreclose on their lien. Unless you win that auction or there are excess funds after they are paid, you simply lose your investment.

    Whether the first lien holder chooses to foreclose on their lien is up to them. Given you have no contractual obligation to them, unless their loan is assumable and you assume the debt, it is quite possible they would foreclose to recover their investment.

  3. #3
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    Default Re: Bidding on a Second Deed of Trust

    Quote Quoting B.Frank
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    If I bid on and win a second deed of trust at a foreclosure auction what are my responsibilities when it comes to the first?
    What do you mean by "bid on . . . a . . . deed of trust"? I assume you're talking about a foreclosure sale in which the holder of the second deed of trust ("DOT") has initiated the foreclosure. Correct? If so, the winning bidder will take the property subject to any senior DOTs or other encumbrances. If the loan secured by the first DOT doesn't get paid, then the beneficiary under that DOT will likely foreclose.


    Quote Quoting B.Frank
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    what if the lender on the first deed of trust does not want me to to be their borrower
    This doesn't make any sense. The beneficiary under the first DOT has a secured interest in the property. It doesn't care who pays the loan.


    Quote Quoting B.Frank
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    can the first then call the loan and force me to pay it off or face another foreclosure?
    Whether the foreclosure of the second DOT constitutes an event of default that would allow foreclosure under the first DOT depends on the terms of the loan documents relating to the first DOT.


    Quote Quoting B.Frank
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    Do I automatically, no matter what, have to pay off the first too?
    The money you pay at auction will go to waste if you don't.

  4. #4

    Default Re: Bidding on a Second Deed of Trust

    What do you mean by "bid on . . . a . . . deed of trust"? I assume you're talking about a foreclosure sale in which the holder of the second deed of trust ("DOT") has initiated the foreclosure. Correct?
    Yes correct.

    Does the holder of the first have the right, regardless of the terms of the loan, to call that the loan be paid in full base solely on the fact that the borrower is now a new person or would there need to be a clause in the original loan documents that allows for this?

    For example, I can imagine the situation where the lender wants to call the loan, even if the new "borrower" is paying, if the loan has a very low interest rate and current rates are much higher.

  5. #5
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    Default Re: Bidding on a Second Deed of Trust

    Quote Quoting B.Frank
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    Yes correct.

    Does the holder of the first have the right, regardless of the terms of the loan, to call that the loan be paid in full base solely on the fact that the borrower is now a new person or would there need to be a clause in the original loan documents that allows for this?
    Most due on transfer clauses within a mortgage loan would allow such to be called into play due to such activity. There are limited exceptions that do not allow a due on transfer clause to be enforced. They are within the Garn St, Germain act. Scroll down to section d for the exceptions.

    https://www.law.cornell.edu/uscode/text/12/1701j–3



    of course that would mean for that to apply there would have to be a due on transfer clause. Most mortgage loans include such verbiage. If there was no such clause, the original debtor would still be obligated to pay the loan. I suspect they wouldn’t be willing which would,mean the lender would likely foreclose and take possession of the property. You would lose your investment unless you paid the first mortgage.

  6. #6
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    Default Re: Bidding on a Second Deed of Trust

    Quote Quoting B.Frank
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    Does the holder of the first have the right, regardless of the terms of the loan, to call that the loan be paid in full base solely on the fact that the borrower is now a new person or would there need to be a clause in the original loan documents that allows for this?
    No, that right does not exist regardless of the terms of the loan. I covered this in my prior response: "Whether the foreclosure of the second DOT constitutes an event of default that would allow foreclosure under the first DOT depends on the terms of the loan documents relating to the first DOT."

  7. #7
    Join Date
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    Default Re: Bidding on a Second Deed of Trust

    Quote Quoting B.Frank
    View Post
    My question involves real estate located in the State of: California

    If I bid on and win a second deed of trust at a foreclosure auction what are my responsibilities when it comes to the first? My understanding is that I will then be subject to the terms of the first but what if the lender on the first deed of trust does not want me to to be their borrower, can the first then call the loan and force me to pay it off or face another foreclosure? Do I automatically, no matter what, have to pay off the first too?
    Why on earth would you get financially involved in something you obviously know nothing about?

    Seems like a good way to toss your money down the toilet.

  8. #8
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    Default Re: Bidding on a Second Deed of Trust

    This thread is very confused.

    First off, you're tilting at windmills. Unless you plan to bid very high, you're not going to win. Nobody is going to foreclose and not protect what they have in the property.

    There's no "partial foreclosure." You can't "bid on and win" a second DOT. If a junior lien (or DOT) institutes foreclosure, the liens are still paid off in priority just as if the first foreclosed.

  9. #9
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    Default Re: Bidding on a Second Deed of Trust

    Quote Quoting B.Frank
    View Post
    Yes correct.

    Does the holder of the first have the right, regardless of the terms of the loan, to call that the loan be paid in full base solely on the fact that the borrower is now a new person or would there need to be a clause in the original loan documents that allows for this?

    For example, I can imagine the situation where the lender wants to call the loan, even if the new "borrower" is paying, if the loan has a very low interest rate and current rates are much higher.
    The issue you are describing is not likely to arise. The reason for that is that that the first lienholder is going to bid on the property themselves if other bidders do not bid enough to cover the mortgage. Of course, that is assuming that I understand what you are saying.

  10. #10

    Default Re: Bidding on a Second Deed of Trust

    Quote Quoting jk
    Most due on transfer clauses within a mortgage loan would allow such to be called into play due to such activity. There are limited exceptions that do not allow a due on transfer clause to be enforced. They are within the Garn St, Germain act. Scroll down to section d for the exceptions.

    https://www.law.cornell.edu/uscode/text/12/1701j–3

    of course that would mean for that to apply there would have to be a due on transfer clause. Most mortgage loans include such verbiage. If there was no such clause, the original debtor would still be obligated to pay the loan. I suspect they wouldn’t be willing which would,mean the lender would likely foreclose and take possession of the property. You would lose your investment unless you paid the first mortgage.
    Excellent! Thanks. This addresses the question clearly.

    Quote Quoting pg1061
    No, that right does not exist regardless of the terms of the loan. I covered this in my prior response: "Whether the foreclosure of the second DOT constitutes an event of default that would allow foreclosure under the first DOT depends on the terms of the loan documents relating to the first DOT."
    Got it.

    Quote Quoting flyingron
    If a junior lien (or DOT) institutes foreclosure, the liens are still paid off in priority just as if the first foreclosed.
    I feel like this in in contradiction with some of the other replies. What you're saying is that in-essence, it's exactly the same no matter which lien-holder initiates the sale? Then why do people advise to be careful when bidding on a junior DOT?

    I don't know if there is a difference so just to be clear; I am referring to a trustee's sale (in California) where a junior lien holder in the second position has initiated a public sale for default of the second DOT.

    Putting this into a real-life example:

    There's a property with a house in California. There are no tax liens on the property or other liens that have ultimate priority. The senior DOT has a balance of $150,000. The second DOT has a balance of $50,000. There are no other liens recorded. The property has an estimated value on the traditional real estate market of $300,000. The owner, and borrower on both liens, no longer cares about the property, has let it deteriorate and has quit making payments on the second. The lien holder of the second initiates a trustees sale.

    I am the highest bidder at the trustee's sale. What do I need to do to have clear title, free of lien encumbrances?

    My understanding is that I need to pay off the balance of the first and have the lien holder release the lien. This response, however, implies that the sale will include payment to the senior lien holder too. Am I missing something?

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