Lien Priority -- Foreclosure of Mortgage Liens Usually Extinguish "Junior" Liens

San Antonio Texas Real Estate Attorney Trey Wilson wrote:

Where competing liens exist on real estate in Texas, there is often confusion about lien priority, and how the foreclosure of a lien against the real property effects other liens, and the interests of the various lien holders.

This is actually a well-settled area of the law, and the adage that "first in time is first in right" generally governs lien priority.  

Following the valid foreclosure of a senior lien, junior liens, if not satisfied from the proceeds of sale are generally extinguished. Thus, "when a senior lien is foreclosed, the purchaser at the sale acquires title to the property free from any junior lien holder claims."  Conseco Fin. Servicing Corp. v. J & J Mobile Homes, Inc., 120 S.W.3d 878, 883 (Tex.App.-Fort Worth 2003, pet. denied); Diversified Mortg. Investors v. Lloyd D. Blaylock Gen. Contractor, Inc., 576 S.W.2d 794, 806 (Tex.1978) ("[T]he foreclosure sale of the senior lien extinguishe[s] the junior lien.").

Foreclosure of a superior (1st in time) mortgage lien created by a deed of trust executed in favor of a mortgage lender will extinguish the following liens, as a matter of law:

• Subsequently-filed mechanics' liens;
• Subsequently-filed liens granting a security interest in the property, including those arising from a "second" mortgage or home equity loan; and
• Subsequently-filed homeowners association (HOA) assessment liens.

Conversely, when a "junior" lien, including any of the foregoing, is foreclosed, such foreclosure does not extinguish senior or superior liens. As a result, the "purchaser" at a foreclosure sale of a junior lien takes title to the property "subject to" any senior liens. (NOTE: Tax liens encumbering a property are beyond the scope of this post, and a topic best reserved for individual discussion).

This issue frequently presents itself when the purchaser of a real property at the courthouse steps (a Trustee's Sale conducted in furtherance of a foreclosure) discovers that other lien holders also seek (or have previously sought) to enforce their lien interests in the property. 

In San Antonio, Texas, the HOA community is particularly aggressive in seeking to enforce assessment lien rights through foreclosure of junior lien interests. However, with very few exceptions, these lien claims are inferior to any lien created by a deed of trust mortgage lien. Thus, even a subsequent foreclosure of the senior lien can obviate the HOA's prior foreclosure of its junior lien interest.

Understanding the inter-relationship between competing security/lien interests in real property -- and the priority of those interests in the event of foreclosure -- can be tricky. In most instances, an experienced real estate lawyer can help make sense of the rights of the various parties to a lien priority dispute.