Does foreclosure wipe out all liens?

DEAR BENNY: In a recent column you said that "a foreclosure by a first-trust (lender) will wipe out any subordinate liens." But that is not necessarily the case, is it?

In the unlikely event that a first mortgagee forecloses on a home and it sells for more than the loan (and expenses), then the balance of the purchase price goes toward subsequent mortgages. Is that not correct? --William

DEAR WILLIAM: It has been a very long time since I saw a surplus when the first-trust lender foreclosed. State law (and/or the terms of the deed of trust or the mortgage document) spells out the distribution of all proceeds from a foreclosure whether or not there is a surplus.

The lender must be paid in full (if possible). The administrative costs -- advertising, auction fee, legal and trustee's fees -- must also be paid.

You are correct; if there is a surplus, after the above-referenced charges have been paid, then the second-trust lender must be paid -- again as much as is left over after paying all first-trust expenses.

But if there is no surplus, the second (and all subordinate liens) are wiped out. The second-trust holders cannot foreclose on the property, but since their borrower signed a promissory note, the borrowers can be sued for nonpayment. Whether the lender will do so clearly depends on the circumstances. If the borrower has no money -- and no job -- it makes no sense to pursue the matter.

DEAR BENNY: In a recent column you wrote, "Yes, the time share will follow your heirs after your death. If you owe the company money and you die, your heirs will be legally obligated to continue making the payments."

Explain how a court would hold an heir responsible for another's debt without a binding contract signed by the heir.

Further, I could add your name on a quitclaim deed without your consent, be foreclosed on, and by your definition, you would be responsible for a deficiency judgment. Please explain this. --Fred

DEAR FRED: First, if this goes to probate, the laws in many states require that all creditors be paid off, which means that the personal representative of the estate may have to sell the time share in order to be able to pay off any outstanding mortgage.

What I should have said is that the heirs will lose the property if they refuse to make the monthly assessments. The deceased person did sign a promissory note secured by a deed of trust. Unless that note and trust is paid in full, the lender (usually the time-share developer) can foreclose.

But you are correct: If you add my name to the deed without my consent (and signature), I am not in any way liable to the lender.

DEAR BENNY: I have a related issue to the recent question from a reader regarding payment of extra principal on a mortgage. A few years ago, I read an article that found banks and mortgage servicers were miscalculating the monthly interest charge when customers submitted payments for additional principal. Is there a standard regulation as to how interest is to be recalculated for the next payment? Does it depend on when the bank actually receives the payment? --Kenneth

DEAR KENNETH: To my knowledge, there are no regulations as to how and when the interest should be calculated. However, the deed of trust (or the mortgage document) usually spells out the procedure for making additional payments.

My suggestion is to make your extra payment when you make your regular monthly payment; in other words, include the extra with the regular and send one check. But make sure that you advise the lender that you are making an extra payment of XX dollars.

If you know how to compute interest, then do the numbers each month. Otherwise, have your financial adviser or accountant calculate what the interest should be and have him or her compare it with the interest reflected on Form 1098 that your lender must send you every January.

Equally important: Have your financial person also confirm that the outstanding balance is correct. Obviously, because you are making extra payments, your balance will be going down faster -- or at least it should if the lender is doing the right calculations.

DEAR BENNY: I have my father's power of attorney. In order to avoid (or lower) the estate tax when he dies, can I arrange to gift myself one of his real estate holdings? --Eric

DEAR ERIC: In general, unless the power of attorney specifically authorizes you to transfer property (real or personal), you cannot transfer anything to yourself. If your father is still alive and competent to make decisions, you may want to talk with him about giving you the authority to make that gift to yourself.

But even if he agrees, you want proof that your dad authorized such a transaction. His lawyer (not yours) should meet with him and confirm (outside of your presence) that this is his intention.

DEAR BENNY: My wife and I are separated and in the process of filing for divorce. She is also relocating out of state for work, and I remain in the condo (the deed is in my name). We purchased the condo at the height of the market, but now we owe about $60,000 more than its current value.

Prior to our separation we had been trying to sell our condo as a short sale, but were unsuccessful in finding a buyer. Now, without her income, I will not be able to afford the mortgage. At this point I have never been late on a payment, but I have the foresight to know that this will not be the case for long, and I have just started the deed-in-lieu process.

Is there any benefit of me struggling to meet the mortgage payment, as the deed-in-lieu goes through? I realize the negative impacts of a deed-in-lieu on my credit, but I am trying to soften that blow. Will making the mortgage payment as long as I possibly can have any type of positive impact on my future credit? --Jim

DEAR JIM: Good question, especially because in recent years many lenders have been telling those borrowers with financial problems, "Stop paying your mortgage for three months and then we will assist you."

I completely disagree with that position. You should continue to make your payments, not only to preserve your credit rating but to show good faith to your lender. However, during the period that you can still make those payments, you should start reviewing alternatives.

You tried a short sale, but it did not work. Do you think you should try that route again? Talk with a professional real estate agent who has experience with short sales and see if there still is some hope.

In the meantime, you are also exploring the deed-in-lieu approach. If you are satisfied that your lender will, in fact, take back the house, then I would not bother pursuing the short-sale approach. However, unless and until you have a written statement from your lender that it will accept the deed "in lieu of foreclosure," I would still keep pursuing other options. But, do your best to keep the mortgage current as long as you can.

DEAR BENNY: I added my daughter to the title of my condo when I moved out of state and she moved into the condo, living there for two years. She is now engaged and she and her fiancé are buying a house together and do not want the condo. If she quitclaims the title back to me, will I have to pay a base up in the taxes or do they remain the same because I am the original owner and have never been taken off title? --Wendy

DEAR WENDY: I am not sure I understand the question. Your real estate tax is based on the assessment made by the tax department in your state (or county). The fact that your daughter was on title and then got off should, in my opinion, not impact the assessed value of your house and thus there should be no change in the real estate tax.

However, you and your daughter should consult a financial adviser, because there may be tax consequences when your daughter gives you back the property. Was it for consideration (i.e., did you pay her anything?) or was it a gift back to you? Your financial advisers should be able to sort this out.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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