Extinguishing Junior Interests in a Mortgage

In a mortgage foreclosure, foreclosing mortgagee has the right to sell the same title that the mortgagor owned at the time she gave the mortgage to the mortgagee. After the mortgage is created, the mortgagor may convey other interests in the property, such as leases, easements, or even other mortgages.

But such interests are junior to the earlier mortgage, meaning the mortgage isn’t subject to such interests. Except in certain cases, the foreclosure sale simply wipes out those junior interests so that they no longer exist.

In a judicial foreclosure action, the mortgagee’s lawsuit must name all the owners of junior interests in order to extinguish their interests. That includes owners of any interest in the property that came later in time, including owners of easements, covenants, liens, other mortgages, and leases.

If these owners aren’t parties to the foreclosure lawsuit, their interests aren’t extinguished by the foreclosure sale and will still encumber the property now owned by the foreclosure buyer.

However, upon discovering the omission, the foreclosure buyer — which may be the mortgagee or someone else — may have several options (unless the mortgagee is the foreclosure buyer and intentionally omitted the junior interest). Those options include the following:

  • Paying off the junior interest: The foreclosure buyer can extinguish the junior interest simply by paying the amount of the junior debt to the junior interest holder.

  • Conducting another foreclosure sale, this time including the omitted junior interest: For this purpose, the buyer is considered to have bought the revived foreclosed mortgage, so the foreclosure buyer can foreclose and apply the proceeds to the revived mortgage debt; the junior interest will then get any excess up to the amount of its debt.

  • Getting a court order giving the junior interest holder a specified time to redeem: To redeem is to pay the outstanding debt that was secured by the foreclosed mortgage and thereby take title to the property.

    With this option, if the property has value beyond the amount of the outstanding debt, the junior interest holder can capture that value by selling the property on the market.

    Some courts make such an order only in certain circumstances, including when the buyer bought in good faith and the junior interest holder knew of the impending foreclosure sale but didn’t disclose its interest, or when the property isn’t worth more than the foreclosed mortgage debt.

In a nonjudicial foreclosure sale, there’s no lawsuit and therefore no occasion for the mortgagee to name junior interests as parties. However, a state statute may require the foreclosing mortgagee to notify the junior interests so that they can participate in the sale to protect their interests.

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