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It is common for real property to have multiple liens against it. The primary or "senior" lien is typically a mortgage lender. Subordinate liens may have attached to a property through loans or judgments awarded to other parties unrelated to the primary lienholder.

Foreclosure is a move by a lienholder to recoup its equity by compelling the sale of the property. My understanding is that once approved by a court, foreclosed property is typically sold at auction, and the proceeds awarded to the lienholders in order of lien seniority. Any liens not satisfied by the sale are removed from the property.

My question is: Do subordinate lienholders have any rights or means, either in law or in practice, to object to a foreclosure in which they fail (or might reasonably expect to fail) to recoup their lien?

For example, suppose a mortgage company has a $400k lien on a house and a creditor has a subordinate $100k lien. If the mortgage company forecloses it is only looking to recoup $400k. So it has no incentive to try to sell the property for more than $400k, and it may put the house to auction with a reserve of just $400k. The second lienholder in that case might argue that it should have a $500k reserve, or not be sold at auction because of a temporarily weak market.

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Usually, subordinate lienholders have a right to redeem property for the amount owed on all prior liens for a short specified time period following a foreclosure sale (typically a week or two each).

In your example, the holder of the $100K lien could, following the foreclosure sale, pay the first lienholder $400K and become owner of the property, wiping out any third lien or more subordinate lien unless those junior lienholders redeemed both the first and second liens.

If the holder of the $100K lien doesn't redeem, he gets any amount over $400K bid at the foreclosure sale (up to the full $100K owed) and his lien is wiped out.

The lender will usually bid the amount of the debt (for which no actual cash needs to be tendered), so if there is no third-party bidder and no junior lienholders redeem, all junior lienholders are wiped out.

If the property is redeemed following the foreclosure sale to a third-party, the buyer at the foreclosure sale never gets a deed to the property he purchased at the foreclosure sale, and he has the purchase price at the foreclosure sale returned to him.

  • Interesting system, thanks for the answer. Could you add a brief note / reference about the jurisdictions where this applies? Or is it mostly the same everywhere in the US? – sleske Oct 28 '17 at 13:38
  • So I see there's something called a "right of redemption," and you're saying that subordinate lienholders share that right along with mortgagors. In any case, at most one lienholder can exercise the right of redemption following a foreclosure sale? And in that case, the redeeming lienholder only obtains ownership of the property at the sale price (plus expenses), and all subordinate lienholders are wiped out in the foreclosure? – feetwet Oct 28 '17 at 17:15
  • @sleske What I describe is a fairly typical approach with lots of variation in detail. Real estate foreclosure law is one of the least uniform areas of U.S. law and atypical foreclosure laws in states like California and Texas were one of the important causes of the housing bubble that led to the 2008 financial crisis. – ohwilleke Oct 28 '17 at 22:07
  • First mortgage holders don't have a right of redemption. Some states, but not all, give the owner a right of redemption. Most states then give junior lienholders a right of redemption. If one junior lienholder redeems, a more junior lienholder can redeem by paying off all liens senior to it. The right is exercised sequentially. Subordinate lienholders who don't redeem are wiped out if a more senior lienholder redeems. In a redemption, sometimes the amount owed on the senior liens (including sale expenses) and not the foreclosure sale price is used, and sometimes the sale price is used. – ohwilleke Oct 28 '17 at 22:10
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    A nuts and bolts explanation of how the redemption process for junior lienholders in Colorado can be found at the Arapahoe County, Colorado website. arapahoegov.com/500/Redemption-Process with the linked policies citing the relevant statutes. – ohwilleke Oct 28 '17 at 22:15

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