Georgia Real Estate - Section 14 Unit 5

A foreclosure occurs January 1, 2016. Of the following, which lien takes priority?

A property tax lien filed January 1, 2014

What is a carryback loan?

A second loan financed by the seller

Second Mortgage

A second mortgage (or deed of trust) can be created at the same time as a first mortgage. For example, a second mortgage may be used when the buyer doesn't have enough cash for the entire down payment. The second mortgage is a junior instrument that takes the exact same form as the first mortgage (the senior instrument), but it's identified as junior by displaying the word SECOND across the front. The term "second" means that if there is a foreclosure, this loan is paid off second—after the first mortgage.

Carryback loan

Another option a buyer may use when there's insufficient cash for a down payment is a carryback loan. This would be a junior loan that's financed by the seller. Note: A carryback loan is a term used for a seller-financed loan. It doesn't always have to be a junior loan; it may also be used to finance the full purchase, making it a senior or primary loan.

What is the name for a loan that creates a lien against property that already has been pledged as collateral?

Junior loan

The Morris family home went into foreclosure December 15, 2016, and sold January 1, 2017. Their contractor had begun work on May 15, 2015, and was not paid, and finally filed a mechanic's lien on October 1, 2016. What date will be used for lien priority for the mechanic's lien?

May 15, 2015

A property has just been foreclosed on. Which of the following describes the rules regarding lien priority?

Property tax liens take priority, with all others following a "first in time" rule

Which of these are examples of junior finance instruments?

Second mortgage Home equity loan

Allows a junior lien to take a lien position ahead of a senior lien

Subordination agreement

Why do junior instruments usually have a higher interest rate than the senior loan?

The risk of the principle being lost is greater in case of default due to the junior loan's lower lien priority

Home Equity Lan

Borrowers who've built up equity in their homes obtain loans using the value of that equity. Because borrowers pledge the same property as collateral they used when obtaining their original loan, the subsequent loan becomes a junior loan. Home equity loans and home equity lines of credit (HELOCs) are common types of second mortgages. Some second mortgages are "open-end" (meaning the borrower can continue to take cash out up to the maximum credit amount and, as the balance is paid back, can draw again up to the same limit) and other second mortgage loans are "closed-end" (in which the borrower receives the entire loan amount upfront and can't redraw after that).

Lifting clauses in a junior instrument allow a senior loan to be refinanced without affecting its senior lien position.

Fact

A second mortgage is identified with the word "junior" on its face.

Fiction

Junior loans are called junior because the interest rate is low in relation to the senior loan.

Fiction

Lien priority is dependent upon the amount of principal remaining on the loan.

Fiction

Mechanic's liens always have first lien priority.

Fiction

Morris still owes his lender for the financing obtained in purchasing his home. Several years later, Morris took out a home equity line of credit. This means that ______.

If Morris is foreclosed on, the home equity line of credit won't be paid until Morris's first loan is paid off

What is the purpose of a lifting clause?

It allows a borrower to refinance a first mortgage without affecting its lien position even when a junior mortgage is in place.

What's the purpose of a typical subordination agreement?

It allows a junior mortgage to move into first lien position

Allows senior liens to be refinanced without affecting the lien position of the junior loan

Lifting clause

Third Mortgage

Sometimes a third mortgage can be used if a buyer has used up all their cash for a purchase and already has obtained a first and second mortgage. The third mortgage will be junior to both the first and second mortgages. Junior instruments will always have a higher risk attached to them because if there is a default, the sale of the property will need to make enough money to entirely pay off the senior lien first before any money goes to junior lien holders. The higher risk involved means that junior loans will typically have a higher interest rate than will senior loans. However, a carryback loan may actually use a lower interest rate, because a seller can be more flexible about financing terms than an institutional lender. In practice, however, sellers often charge higher than the going rate because they know the seller is assuming more risk, since the buyer is unable to obtain traditional financing.

Ways to Modify Lien Priority

There are a couple of ways that lien priority can be modified in spite of the recording date. The junior and senior lien holders may create a subordination agreement, where the senior lien holder agrees to subordinate or lower its lien position in favor of the junior lien. This agreement must be signed by both lien holders and recorded. Alternatively, a first mortgage may include a subordination clause in anticipation of the borrower obtaining a second mortgage against the property. Any junior mortgage can include a lifting clause. This is a provision that allows the lien(s) ahead of the junior mortgage to be refinanced without changing their priority in lien positions. Without this clause, a borrower with a second mortgage could never get a lender to agree to a refinance of the first mortgage because the second lienholder would immediately advance to first position as soon as the first mortgage was paid off as part of the refinance. Because the first mortgage generally has a larger principal, the lender wants to maintain that first lien position. One requirement of using this clause is that the refinance can't be for a larger amount than remained on the first mortgage at the time that the junior mortgage was created.

Brandon's home has been foreclosed on. He had an outstanding loan balance of $145,000, which he owed to his lender, XYZ Lending for a loan taken out in 2009. There's also a lien against the property recorded in 2014 for an unpaid student loan of $25,000, and a HELOC established in 2012 of $30,000, of which he'd used $10,000. If his foreclosure nets $150,000, how much will each creditor be paid?

XYZ Lending will receive $145,000, the HELOC lender will receive $5,000, and the lien holder for his student loan will not be repaid.

Which of the following is true about a home equity line of credit?

A borrower can use the funds as needed, repay them, and borrow them again.

A homeowner has been paying her mortgage for several years and has built up equity. She decides to take out a home equity line of credit because she needs some cash. This credit will create ______.

A junior lien on the property

Using Junior Finance Instruments

A loan that creates a lien against a property that already has been pledged as collateral is a junior lien. The first lien (usually a mortgage or deed of trust) is the senior lien. Some examples of junior liens against a property:

"First in time" refers to lien priority according to recording date.

Fact

A second loan is second in lien position to the first loan.

Fact

Both the open-end and closed-end home equity loans are junior mortgages.

Fact

A junior mortgage must be for a lower loan amount than a senior mortgage.

Fiction

Duane and Tina have a first and a second mortgage on their property when they both lose their jobs and eventually default on both loans. They're also unable to pay the contractor who put in a new kitchen right before the job loss, and that contractor has now placed a mechanic's lien on their property. The first mortgage was recorded on August 5, 2011, the second mortgage in January of 2013, and the kitchen remodel was started in December of 2012, with the lien recorded in June 2013. When their lender forecloses on the property, what's the lien priority in this scenario?

First Mortgage - 1 Mechanic's Lien - 2 Second Mortgage - 3

Lien Priority for Finance Instruments

Lien priority is important because no one wants to get left out when a foreclosure occurs. Everyone who is owed money by the borrower and has created a lien on the property wants to get paid out of the foreclosure proceedings. But if there isn't enough money from the sale, some junior liens may end up with nothing. For the most part, lien priority is determined by date of recording. This is sometimes referred to as "first in time." So a first mortgage recorded on June 1, 2001 takes priority over a second mortgage that is recorded on May 10, 2003. But there are certain exceptions. --Property taxes get top priority over everything, regardless of recording date. They'll get paid first out of the proceeds from the property sale. --Mechanic's liens follow the "first in time" rule, but rather than the date of recording, state law may establish that the lien starts when the contractor's work started on the property. For example, a homeowner hires a contractor to build a deck. The work starts on September 1. After the deck is completed, the homeowner doesn't pay the contractor's entire bill. The contractor tries getting his money from the homeowner, but by December 1 can see that it's not happening, so he places a lien on the property. In terms of lien priority, that lien will commence on September 1, the day the contractor began work.

What does the concept "first in time" refer to when discussing lien priority?

Liens are paid based on date of filing