Real Property: Mortgages: Foreclosure

Foreclosure: land is sold and sale proceeds go to satisfying the debt.

Assuming that our mortgagee-creditor must look to the land for satisfaction, the mortgagee must foreclose by proper judicial proceeding. At foreclosure, the land is sold. The sale proceeds go to satisfying the debt.

If the proceeds from the sale of Blackacre are less than the amount owed: the mortgagee brings an action against the debtor for a deficiency judgment.

If surplus—junior liens are paid off in order of priority. Any leftover goes to debtor.

EX: Assume that Blackacre has a FMV of $50,000 and is subject to three mortgages executed by its owner, Madge. First Bank, with first priority is owed $30,000. Second Bank, with second priority, is owed $15,000, and Third Bank, with third priority is owed $10,000. Assume that First Bank’s mortgage is foreclosed, and that Blackacre is sold for $50,000. How will the funds be distributed?

Off the top: (1) Attorney’s fees; (2) Any expenses associated with foreclosure; (3) Any accrued interest on First Bank’s mortgage.

The sale proceeds are then used to pay off the mortgages in the order of their priority. Each claimant is entitled to satisfaction in full before a subordinated lienholder may take. Thus, First Bank takes $30,000. Then, Second Bank takes $15,000. The remaining balance is applied toward Third Bank which takes $5,000.

Third Bank should be able to proceed for a deficiency judgment.

Now assume the same facts as above, except that Blackacre is sold at First Bank’s foreclosure sale for $60,000. What result? After all creditors are paid in full, the $5,000 surplus goes to the debtor.