In the context of mortgages, a lien is a provision within a loan contract that grants the lender legal possessory rights over a borrower’s property in the event that the borrower defaults on the loan. A lien clouds a property’s title/ownership and prevents the sale or refinance of the property until a lender’s balance is satisfied.
Equity refers to the monetary difference between a property’s market value and all of its combined loans and liens. All property liens require that there is equity in the property, otherwise no interest can be secured.
Different Types of Liens
When a borrower consensually agrees to pay back a debt — for example, in the case of a mortgage — it is called a voluntary lien. The borrower acknowledges the debt by allowing a lender to place a lien on the property as security indicating their interest in the property.
Conversely, a lien placed on real property without the borrower’s permission is called an involuntary lien. A borrower’s failure to make payments on a debt allows a lender to claim a lawsuit against the borrower; if the lender wins, he/she has the ability to place a lien on the borrower’s property.
An involuntary lien is typically made at the direction of the courts. It is one of the primary methods lenders use to secure payment from the borrower. It is usually ordered due to a borrower’s failure to make payments. If an involuntary lien is placed on the borrower’s real property and they fail to make payments or arrange a payment schedule with the lender, the lender may have the right to foreclose on the property.
A general lien is a lien placed on all real property owned by the borrower; a specific lien is a lien on a specific property.
Subordination Agreement and Liens
A subordination agreement establishes the order of lien holders and their superiority/inferiority to each other, designating first, second, and third lien holders. In the event that a property forecloses, lien holders will recoup their debts in the order established in the subordination agreement.
In California, courts typically adhere to the “first in time, first is right” rule. This means that they determine lien holder rights based on which lien was first placed on the property.
A senior lien holder is the first loan, thereby giving it first lien position.
An antimerger clause is a provision in a mortgage contract that states that the senior lien holder has priority over other liens, whether personal or secondary mortgages. In the event an antimerger clause is present and the property is foreclosed, the senior lien holder will be paid first. Any remaining proceeds will be used to pay off junior liens.
Purpose of Liens
Traditional lenders typically do not fund loans in which they are not the senior lien holder. It is common for lenders to initiate a subordinate agreement in order to put themselves as the first lien holder of record. Therefore, it may be advantageous for a property owner to subordinate the position of the liens in order to obtain a loan. Junior lien holders must agree to the proposed subordination, however. A junior lien holder is the second or third loan, therefore they are considered a secondary loan.
Junior lien holders face a precarious situation when trying to recoup their investment from a borrower who defaults on a senior lien. If the senior lien holder decides to foreclose, the sale proceeds go to them first; only if there is leftover money does a junior lien holder get paid. However, the debt is still owed to these junior lien lenders, who can take other legal actions in an attempt to recover their investment.
Junior Lien Specifics
The problem junior lien holder’s face is that because auction sales can only be paid in cash there are very few capable buyers who purchase the property. This causes the property to be sold at below cost, significantly affecting the junior lien holder’s ability to recoup lost investment.
It is common for the junior lien holder, if they have the financial means to do so, to pay down the debt of the defaulted borrower to postpone the foreclosure. This postponement of the mortgage gives the junior lien holder time to initiate their own foreclosure process.
A junior loan can make a request for a notice of default to be provided to them. The terms of the default will help the junior lien holder determine the best route to recoup the lost investment. If the junior lien holder is awarded the property in auction, they become full owner of the property unless there are other senior liens ahead of their junior lien. It is therefore advantageous for a lien holder to be among the first loans to ensure their financial interests in the event a property is foreclosed and sold.
A subordination agreement may also be used to rearrange the order of lien holders for the purpose of designating loan priority.
A subordination clause stipulates that current debts take precedence over future debts in lien authority.
Conversely, a dragnet clause is a clause in a trust deed that permits future liens to take precedence over other liens by attempting to get as much collateral and money as possible for the lender.
The standard order of lien holders in a subordination agreement are as follows:
Obligatory advances in construction loans
Senior lien holder
Junior lien holders
A tax lien is an involuntary lien resulting from the property owner being substantially behind on real property taxes. Put more simply, a tax lien refers to unpaid property taxes.
In the United States, tax liens hold seniority over all other liens, regardless of the loan amount or the date another loan was initiated. In the event that a defaulting borrower’s property forecloses, a tax lien will always be satisfied first.
Tax liens must be paid off in order for someone to live on the property. Therefore, a potential buyer of a foreclosed property must pay the unpaid property taxes before he or she may take ownership of the property.
A real property tax assessment refers to when the government evaluates a property to determine its base value. A property’s value is reassessed whenever a property is sold, or when the value of the property increases significantly. Property taxes are calculated based on the property value and are known as ad valorem taxes.
A property is not reassessed for property taxes when:
It transfers to a spouse
It transfers to a family member
It transfers to children through a sale, gift, or inheritance
Alterations make minor changes to the value
Property owners must make two annual property tax payments: one before April 10th and one before December 10th. Tax guidelines are released before September 1st of every year.
When residential real estate property owners default on property taxes, they have a five-year redemption period.
However, their properties will appear on tax-defaulted property rolls. This means that their properties can be purchased by a buyer as a tax debt. This temporarily supplies the government with the defaulting party’s property taxes, while allowing the buyer to gain interest in the property. Then, if the property foreclosures after the redemption period, the tax debt buyer can potentially recoup the property and the opportunity to sell it.
As the government wants to maximize its collection of property taxes, it has a strong interest in property owners retaining their homes. Therefore, certain groups of people can defer property taxes on their primary residence in order to avoid foreclosure. Tax-deferred groups include seniors and the disabled.
A judgment lien is a court-ordered, involuntary lien that grants a lender the ability to take possession of a borrower’s property if the borrower fails to meet his or her financial obligations to the lender. Because unsecured debt is difficult to collect after a borrower stops making payments, a judgment lien is the best way for lenders to recoup their losses.
A judgment lien prevents a property owner from refinancing or selling his or her property until a debt has been repaid. If a debtor does not satisfy his or her debt, his or her property may be seized and/or sold.
A lender may only place a judgment lien on a borrower’s property if the lender files a lawsuit against the borrower and wins. If the court indicates that a judgment is a proper legal remedy for the damaged party to collect their money, an abstract of judgment is issued. This written statement from the court summarizes the terms of a judgment against a borrower and/or places a judgment lien on the borrower’s property.
When a Borrower Doesn’t Have Property for a Lien to Be Placed On
When a borrower does not own real property on which to place a lien, a lender has the right to place a lien on the borrower’s future real estate purchases.
The priority of judgment liens is based on the date of judgment. However, judgment liens never take precedence over purchase and refinance-based liens which are mortgages, or tax liens.
Judgment liens can be terminated for the following reasons:
The borrower pays off the debt
The borrower declares bankruptcy
The borrower and lender reach a settlement
Statute of limitations is reached
If a borrower pays off his or her debts, the county must be informed and remove the judgment lien from the property within 20 business days of the payment.
If both the lender and the borrower consent to a settlement — which could be a full or partial payment of the original debt — the judgment lien may be removed. A lender will usually consider settling a debt for pennies on the dollar as a way of recouping some of their losses.
The statute of limitations for a judgment lien is ten years after its recording. If a property with a judgment lien forecloses and the borrower buys a new property within the ten year time frame, the judgment lien shifts to the borrower’s new property. If it is more than ten years, however, the lender loses the right to collect the debt.
Writ of Attachment and Involuntary Liens
A writ of attachment — also known simply as an “attachment” — is a specific, involuntary lien that grants the courts the right to seize (or “attach” to) a property in order to satisfy a judgment against a borrower. A writ of attachment is the next step after a lien has not delivered a satisfying result for the party that is owed money.
To do so, a lender must file a lawsuit against a borrower. Lenders must supply the court with documentation of the amount of debt owed by the borrower, as well as demonstrate the vital facts detailing why an attachment lien is necessary to protect its financial interests.
If the court sides with the lender, it will file a writ of attachment. The borrower must be notified prior to the court’s granting of an attachment, however. The ensuing attachment hearing allows a borrower to present his or her side of the facts.
If the lender wins the case and/or a borrower does not respond to the attachment claim, the court will file a writ of attachment. A local sheriff will subsequently seize control of the property and may put it into foreclosure. In order to have the property restored, the borrower must either pay the full debt amount, settle the debt, or establish a repayment plan.
Writ of Attachment Affect’s a Borrowers Land Ownership Rights
A property owner cannot sell his or her property when an attachment is present. This is to prevent borrowers from transferring a property to a family member, friend, or third party in order to avoid paying a lender. If a lender believes that a borrower is planning to sell his property so he can leave town and avoid paying his debt, the lender may choose to file for a writ of attachment in order to prevent the sale from taking place.
The statute of limitations for a writ of attachment is three years. However, the courts may extend an attachment period, or release it entirely, if they deem it necessary.
Conversely, if the court rules in favor of the borrower, the lender cannot apply for an attachment in the future.
In the past, it was much easier to obtain an attachment from the courts. Many property owners lost their properties for a simple debt that could have been settled. That is why The Supreme Court established a basic attachment process. Nowadays, it is much more difficult to place an attachment lien on a borrower’s property.
Homeowners’ Association Liens
A homeowners’ association (HOA) can place an involuntary lien on a property owner’s property for being delinquent on 12 or more months of HOA fees. The minimum unpaid balance must be at least $1,800 in order to place a lien on the property, or to foreclose.
A mechanic’s lien — or construction lien — is an involuntary lien filed against a property by a contractor who has performed services on behalf of a property owner, but is subsequently not paid for those services.
Any licensed contractor who supplies labor and/or materials may file a mechanic’s lien if a property owner defaults on his or her payment obligations. Such liens serve to protect a contractor’s financial interests. However, a property owner must have equity in the property in order for a mechanic’s lien to have an effect.
A mechanic’s lien clouds a property’s title, therefore preventing a property owner from refinancing or selling that property. A property owner must pay the full debt amount, settle the debt, or establish a repayment plan in order to terminate a mechanic’s lien claim. An owner may also file a surety bond covering up to one and a half times the cost of the lien amount. If left unpaid, a mechanic’s lien will result in the foreclosure of the property. Even in the event of a foreclosure, a mechanic’s lien will remain on the property until the full debt has been paid off.
The priority of a mechanic’s lien in relation to other liens is based on the date that a project begins. This means the sight of the first employee, or when material is first delivered to the job site.
Example of Mechanic’s Lien
For example, say Bob begins work on remodeling Mrs. Baker’s house in May. In June, Mrs. Baker takes out a loan from the bank in order to fund the project. However, Bob and Mrs. Baker get into a dispute. When Mrs. Baker refuses to pay Bob in October, he files a mechanic’s lien. Even though the mechanic’s lien was filed in October, the project’s start date was in May, therefore granting Bob’s mechanic’s lien priority over the bank’s loan.
In the construction business, various contractors and subcontractors may provide work for the same property owners. The flow of money from a property owner to contractors and subcontractors can oftentimes create payment disputes.
Therefore, it is advisable for parties to sign a release form after each step of a project. A release form should indicate any payments that have already been submitted, the payments that are still owed, and the expected dates on which those payments will be received. Property owners should also include a signature line on which contractors agree not to file any mechanic’s liens after full payment has been received.
Business and Professions Code Section 7031 (a) states that an unlicensed contractor cannot sue in order to recover compensation for the performance of services. Only contractors who are licensed throughout the entire contract are able to recover for damages in the event of an owner not paying for services rendered by the contractor. Therefore, an unlicensed contractor cannot file a mechanic’s lien against a property owner.
Writ of Execution and Liens
A writ of execution is a court-ordered judgment whereby a court takes possession of a defaulting borrower’s property as a means of collateral for a lender. The seized property may be a physical piece of real estate or a borrower’s bank account. A writ of execution may be used if a borrower defaults on their debt as a means to recoup the debt that is owed.
To file for a writ of execution, a lender must file Form EJ-130 with a court. Some courts may also require the lender to submit an affidavit detailing the borrower’s debt. Should the court approve a lender’s request for a writ of execution, the court will order a sheriff to seize the borrower’s property.
The lender may then foreclose on the property as a means of recouping its losses. The property is sold at a public auction known as an execution sale, or sheriff’s sale. The property transfers to the new buyer via a sheriff’s deed. The purchase of a property from a sheriff’s sale is not protected by any warranties; it is the new buyer’s responsibility to inspect the property’s title history before purchasing.
California courts always attempt to help a property owner avoid foreclosure when it is an option. If a writ of execution has been requested, a borrower is given the option to pay off the debt, get on a payment plan, or settle the debt with the lender. A court may also grant a temporary freeze on the borrower’s property title or place a lien on the property, instead of foreclosing.
Some forms of income and assets are exempt from a writ of execution:
social security income
retirement accounts (i.e. IRAs)
A writ of execution is only valid for 180 days. After that period, it must be renewed.
Case Law As It Relates to Liens
Case Review: Webber v. Inland Empire Investments, Inc. (1999)
The case of Webber v. Inland Empire Investments, Inc. (1999) 74 Cal.4th 884., involved a dispute regarding fraud between a senior and junior lien holder.
Four parcels of land were sold to a corporation (Forecast Mortgage Corporation) for $4.5 million. Forecast Mortgage executed a promissory note with a lender (Hyatt) for $754,000. Webber was the assignee and holder of debt.
Sanwa Bank lent Forecast Mortgage Corporation the remaining $3.6 million. All four parcels of property were used as collateral to secure the loan. The Sanwa deed had priority because it was recorded prior to Hyatt’s deed.
During this time, the title was transferred from Forecast Mortgage to another sister company, Forecast Corporation (All of these companies were subsidiaries of Inland Empire Investments.) Forecast Mortgage also stopped making payments on the Hyatt note. Inland’s owner (Previti) then purchased the promissory note and deed of trust from Sanwa Bank and allowed Forecast Mortgage to default on the note. At this point, Inland Investments — the senior lien holder — foreclosed on the property. This extinguished Webber’s junior lien, resulting in a loss of $754,000 plus interest.
Webber sued Inland Empire Investments for declaratory relief and conspiracy to defraud. Webber alleged that the defendants had “joined together” to eliminate his junior lien through planned transactions which resulted in a “sham foreclosure” on the senior lien. The Superior Court agreed with Webber and ruled that Inland Empire Investment’s actions were illegal. Inland appealed. The Court of Appeals affirmed the lower court’s ruling.
Case Review: Lo v. Jensen (2001)
The case, Lo v. Jensen (2001) 88 Cal.4th 1093., involved a dispute over a foreclosed condominium that was bought at a public auction.
A condominium owner (Lo) owned a condo valued at $150,000. However, Lo fell behind on his H.O.A. fees by $5,412. A homeowners’ association lien was filed and Lo’s property went into foreclosure.
An experienced foreclosure buyer (Jensen) planned to purchase the property at a public auction. Another buyer (Ko) approached Jensen and suggested that they bid together. By doing so, they could prevent the open and fair bidding of the auction process and acquire the property for far less than its true value. Jensen agreed. The two buyers were able to purchase the property for the amount of the H.O.A. lien ($5,412). As the property did not have any additional liens, this meant that they were the sole owners of the property.
Lo sued alleging Jensen and Ko conspired together to purchase the property in an illegal manner. The Superior Court concluded that Jensen and Ko had illegally joined together to eliminate competition, helping them secure the property for only 3% of its market value. It held them liable. Jensen appealed. The Court of Appeals affirmed the lower court’s ruling. It cited the Civil Code Section 2924, which makes it illegal to “fix or restrain bidding at a foreclosure sale”.