Question

Suppose a borrower with two mortgages defaults. At the time of the default, the first lien has a balance of $200,000; the second lien has a balance of $25,000. The borrower owes $5,000 in property taxes and $2,000 to a relative that lent the borrower money. The house sells for $215,000 in a foreclosure auction. How much of a deficiency will the second lien lender have?

		$10,000
		$15,000
		$17,000
		$8,000

Answer 1

Lien represents a claim on the asset and it is used by lenders to safeguard the debt repayment. In case of default, lenders can auction the property and settle the outstanding dues.

Lender with first lien has priority over the second and it will be settled first to full extent of outstanding, before second lien is settled. On top of it, statutory outstanding or federal taxes has precedence over rights of all other creditors. So, Tax liability will be paid before lenders out of sale proceeds of property.

Given, House sells for $ 215,000

Before of second lien tax will be paid and first lien will be paid. Loan from relative does not have lien.

So, amount available for second lien = sales amount – tax – first lien

                                                                  = $ 215,000 - $ 5,000 - $ 200,000 = $ 10,000

Deficiency for second lender = Balance on lien – amount available

                                                    = $ 25,000 - $ 10,000 = $ 15,000

Answer: $ 15,000