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Real Property • Security Interests in Real Estate
PROP#225
Legal Definition
A buyer at a foreclosure sale takes subject to a senior interest, but is not personally liable on the senior debt. If unpaid, the senior creditor will foreclose against the land, so the buyer has incentive to pay off the senior interest.
Plain English Explanation
Imagine a mortgage as being a single link of chain that attaches to a property, weighing it down. Each additional mortgage adds another chain link to the link above it. Imagine 3 mortgages on a property. The top link is senior to the bottom 2 junior links. Similarly, the middle link is junior to the top link, but senior to the bottom link.
When a mortgage forecloses on a property, it only affects the junior links that hang from it. Senior mortgages are left alone and follow the property as it is foreclosed on and sold.
When a mortgage forecloses on a property, it only affects the junior links that hang from it. Senior mortgages are left alone and follow the property as it is foreclosed on and sold.
Hypothetical
Hypo 1: Amy owns Whiteacre. On January 1, Amy gets a mortgage from Bob. On January 2, Amy gets a mortgage from Carl. On January 3, Amy gets a mortgage from Dan. Amy struggles to keep up with her payments to Bob, Carl, and Dan. After a few months, Amy defaults on her mortgage to Carl. Carl forecloses on Whiteacre and notifies Dan. Ed purchases the foreclosure sale, which frees Whiteacre from both Carl and Dan's mortgage. However, Ed takes Whiteacre with Bob's mortgage still attached. Note that this doesn't mean Ed is personally liable to pay the mortgage to Bob -- only Amy is still on the hook for that. However, Ed is incentivized to pay the mortgage because if he doesn't, Bob has the right to foreclose on Whiteacre.
Visual Aids
Related Concepts
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What security interests exist under a absolute deed?
What security interests exist under a deed of trust?
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