Understanding Fund Distribution in Maryland Foreclosure Auctions

A property is encumbered by a first mortgage of $60,000 and a second mortgage of $23,500. If sold at a foreclosure auction for $88,000, which statement is FALSE regarding fund distribution?

• A. The first mortgagee receives $60,000.
• B. The second mortgagee receives $23,500.
• C. The second mortgagee receives nothing unless he forced the foreclosure auction.
• D. The former owner receives $4,500.

Answer: (C)

In the context of foreclosure auctions, the way funds are distributed adheres to a priority order based on the lien positions of mortgages. The first mortgage takes precedence over the second mortgage. When the property is sold at a foreclosure auction for $88,000, the proceeds will first satisfy the amount owed to the first mortgagee, which is $60,000. Following that, there remains $28,000 in the distribution pool after the first mortgage is paid (since $88,000 - $60,000 = $28,000). The second mortgage debt of $23,500 can then be fully satisfied with this remaining amount. This allows the second mortgagee to receive their due amount, confirming that they are entitled to payment as well. After paying off both mortgages, the total amounts disbursed are $60,000 to the first mortgagee and $23,500 to the second mortgagee, resulting in a total of $83,500. The leftover funds amount to $4,500 ($88,000 - $83,500), which would be distributed to the former owner. Thus, the inaccurate statement is that the second mortgagee only receives something if he forced the foreclosure auction, which is not true; he is entitled

When it comes to the nitty-gritty of foreclosure auctions in Maryland, things can get a bit tangled, right? If you’re gearing up for the Home Improvement PSI Exam, understanding the flow of funds during a foreclosure is crucial.

Let's break it down! Imagine there's a property with a first mortgage of $60,000 and a second mortgage of $23,500. If that property sells at a foreclosure auction for $88,000, how do the funds get distributed? It’s like a game of musical chairs—with clear rules about who gets what.

First up, we’ve got the first mortgagee, the first in line when it comes to settling debts. They'll walk away with $60,000, as that’s what they’re owed. But wait! What about the second mortgagee? You’d think they’d swoop in next, right? Not so fast!

After paying off the first mortgage, we’re left with $28,000, already making it to the next round. That’s the amount we have to satisfy the second mortgage. So, our second mortgagee, who’s got $23,500 on the books, can definitely get that payment. This is where things sometimes confuse folks. Some might think they only get paid if they force the foreclosure auction. Not true! They’re entitled to payment as long as there are funds after the first mortgage is satisfied.

Now, let’s tally this up—$60,000 plus $23,500 equals $83,500. We started with $88,000, and that means there’s a remaining $4,500 left over. Surprise! That leftover cash goes back to the former owner. It’s like finding a little extra cash in your jeans after lots of laundry—nice, right?

So, let’s circle back to the initial question about the statement that claims the second mortgagee receives nothing unless they force the foreclosure auction. This is the false one! The mortgage world has its complexities, but once you understand these basic principles, you’ll find yourself navigating the waters more confidently.

In essence, understanding fund distribution during a foreclosure auction is not just beneficial for passing your exam; it’s vital for anyone engaging in real estate in Maryland. Keeping these principles in mind will serve you well not just in exams but well into your professional journey in home improvement and real estate.