Back in February, we reported on foreclosure auction websites run by Florida municipalities that sometimes fooled unsavvy bidders into thinking they were buying a home, when they were really purchasing a worthless second lien. The San Francisco Chronicle reports today on a Bay Area resident who unfortunately must not have read that post. Today's article makes clear that this sort of thing can happen even without a confusing website. Here's the Californian who now owns the second lien explaining what happened:
"Apparently, unbeknownst to us, Wachovia sold us a worthless second mortgage that was part of a piggyback loan made to the" previous owners, Roberta Strand said. "Both loans were originated, signed and recorded on the same date. Rather than foreclose on both loans at the same time, Wachovia chose to foreclose, market and sell the worthless junior lien, purporting it to be the real property, which is what we purchased."
Of course, Wells Fargo (now owner of Wachovia) denies that it mislead Strand. And then, she explains the common problem: a naive belief that the bank wouldn't take advantage of inexperienced auction bidders:
"It didn't occur to me that a bank could auction off a worthless piece of paper," Roberta said. She looked up the property's records at the courthouse. Since both loans were recorded at the same time and date, she mistakenly thought it was a single loan.
According to the article, Wells declined to directly answer why they would sell a second mortgage that had no value. But that's not asking the right question. The question isn't why would they, but why wouldn't they sell something having no value if some ill-informed person is willing to pay good money for it? Wells' indirect response was that state law requires banks to auction off second liens as part of the foreclosure process, and often this occurs before auction of the first lien due to timing. So this auction winner should probably have some anger towards the state of California for a convoluted regulatory regime as well.
The moral of the story here is the same as before. Do lots of research when considering buying a foreclosed property. You may even want to consider consulting a lawyer or other expert if you aren't a seasoned real estate investor. And never expect a bank to be looking out for your best interest.
(h/t: Calculated Risk)