Sunday, July 6, 2014

MBE Fast Fact: Priority of Mortgages

Mortgage questions are some of the most difficult questions on the MBE. Some of them are just brutal. One issue that comes up often enough that it's worth knowing well involves a senior mortgagee who fails to include a junior mortgagee in a foreclosure sale.

As a general rule, the priority of a mortgage is determined by the time it was placed on the property (Exceptions do apply, such as purchase-money mortgages which can have priority over prior mortgages placed on the property.) Generally foreclosure will terminate interests junior to the mortgage being foreclosed, but will have no effect on mortgages senior to the mortgage being foreclosed.

Watch carefully, however, for situations where a senior mortgagee fails to include a junior mortgagee as a party to the foreclosure action. Such failure on the part of the senior mortgagee will preserve the rights of a junior mortgagee so that the general rule that the junior mortgagee's rights are extinguished will not apply.

The policy behind the above analysis is that the junior mortgagee has the option to pay off any liens senior to the junior mortgagee that are in default, and that right makes the junior mortgagee a necessary party to any foreclosure action on the part of a senior mortgagee. By not including a necessary party in the foreclosure action, the senior mortgagee effectively preserves the rights of the junior mortgagee. Anyone who then purchases the property at the foreclosure sale will purchase subject to the interests of the junior mortgagee.

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