2nd Mortgage Reattaches After Foreclosure and Bankruptcy

Lots of people are still facing home foreclosure in Los Angeles.

This week I was reminded that a “sold out” 2nd mortgage reattaches after foreclosure, and is revived, where the borrower, or “trustor”, comes on title to the property after the foreclosure sale.

This often happens where a family member of the person who owns the property that is being foreclosed purchases the property at the foreclosure sale in their name for the benefit of the owner. Later, the family member transfers title to the property back to the owner. While this may sound like a good idea, by doing so the …

2nd Mortgage Reattaches After Foreclosure

In California, liens recorded first in time are first in right. California is a “race notice” state. This means the first one to get to the Los Angeles Recorder’s Office and record wins. This is important because liens are paid in order of their priority.

Foreclosure wipes out all liens that are junior to the lien being foreclosed. However, any liens that are senior to the lien being foreclosed survive, and the buyer at the foreclosure sale takes the property subject to the senior liens.

As is often the case, the senior lien holder will foreclose first, wiping out all junior liens behind it. Following a foreclosure sale in California these junior liens are sometimes referred to as “sold out” junior lien holders because the property that once “secured” their lien is no longer there, leaving them with only an unsecured claim for payment.

Depending on the nature of the loan at the time it was made, the “sold out” junior lien holder may or may not be allowed to pursue the borrower for payment of the loan after foreclosure.

However, California Civil Code section 2930 states that, “[t]itle acquired by the mortgagor subsequent to the execution of the mortgage, inures to the mortgagee as security for the debt in like manner as if acquired before the execution.”

This means that a “sold out” junior lien reattaches to the property following a foreclosure sale if the original borrower later comes back on title to the property.

This is what happened in the California Supreme Court case of Barberi v. Rothchild, 7 Cal.2d 537 (1936). In Barberi the owners of the property obtained two loans secured by deeds of trust against their property. The holder of the 1st deed of trust foreclosed the property when the borrowers failed to make the payments on the loan, thereby wiping out the 2nd trust deed. However, the borrowers later purchased the property from the foreclosing lien holder. The court found that upon the borrowers taking title to the property the 2nd trust deed was revived and attached to the property citing California Civil Code section 2930.

Before you transfer title to real property talk to an experienced real estate lawyer in Los Angeles.

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