Roberta and Randall Strand took $97,606 out of their paid-off house to buy a foreclosed home at a courthouse auction. Five months later, they found out they actually bought the second mortgage, and that the bank planned to foreclose on the first mortgage, leaving them out in the cold.
The family received and recorded a "trustee's deed upon sale" in November 2009, shortly after the auction, without realizing that they had bought a second mortgage. They showed a locksmith this deed to have the house's locks changed, which they said the auctioneer had suggested. The Strands' daughter, Hayley Strand, and her fiance, Bryan Janbay, moved into the house, about a mile from her parents in the Santa Cruz County town of Boulder Creek.
They spent more than six weeks and $13,000 fixing up the house, which they described as in terrible shape with broken windows and no plumbing, light fixtures or appliances.
"They were born and raised here, and we bought the house to keep them close," Roberta Strand said. "The plan was that we would float them the cash for the home, then they would get their own mortgage and pay us back."
In April 2010, a notice was posted on the home's front door that it would soon be auctioned at a courthouse sale - just like the one where the Strands had bid.
"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."
Wells Fargo, which owns Wachovia, said in a statement: "We believe the foreclosure auction of the property on which the Strand family bid was done correctly, and are confident the legal resolution to this matter will bear that out."
How could such a situation happen?
Courthouse-step auctions, also called trustee's sales, are the final step of the foreclosure process in California. Homes sold at these auctions carry no guarantees on their condition or title. The vast majority revert to lenders. A handful are sold to outside investors, who must pay cash, and must accept the property as is.
Jason Menke, a spokesman for Wells, said: "When these properties are sold at auction, they're without covenant or warranty. It's the responsibility of the person bidding at auction to fully understand exactly what they are bidding on and what the implications are. Bidding on property at foreclosure auction is a very different process from a standard home purchase."
The Strands found the house on RealtyTrac, a subscription website that lists foreclosure actions filed with the county. They drove by and looked in the windows. They thought the house was probably worth about $200,000. (This month Santa Cruz assessed the home for tax purposes at $200,000.)
Didn't getting it for half price raise any red flags?
"We thought, this is a good deal, but didn't think it was a great deal," Roberta said. "The house was a mess."
Did they think they had clear title?
"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.
Why would a bank sell a second mortgage that may have no value?
While Wells declined to directly answer this question, its legal filings in this case said California law adds a 90-day delay to the foreclosure process for first mortgages. Second mortgages can be foreclosed upon more quickly, which presumably is what happened in this case. Wells had to offer the second mortgage in a courthouse-step auction because California requires that as part of the foreclosure process.
The few investors who do bid at courthouse auctions generally are sophisticated enough to research outstanding liens. If no one bids - as happens more than 90 percent of the time - the loan automatically reverts to the lender.
It would be a rare investor nowadays who would bid on a junior lien, so the expected outcome would have been the loan going back to the lender.
A second mortgage could have value if a home were worth more than the two mortgages. For instance, if a million-dollar home had a first mortgage of $500,000 and a second mortgage of $200,000, the second lien would have value. However, in today's market when many homes are underwater - worth less than the loan amount - it would be highly unusual to find a second mortgage at a foreclosure auction that was worth anything.
"It can be a problem when people new to foreclosure purchasing go to an auction and don't really know what they're bidding on," said Rick Sharga, vice president of RealtyTrac. "That's why we strongly counsel people new to foreclosure purchasing to stay away from trustee's sales and sheriff's sales. People will think they're getting a great deal on a property and wind up getting a second mortgage. Or they'll buy properties and find incredible damage or flaws because it's almost impossible to inspect them in advance."
Before they got the notice of the trustee sale, the Strands had received a notice of default for the previous owner and tried to contact Wachovia, but it wouldn't talk to them since their names were not on that loan.
The Strands hired an attorney. A judge said he would only halt the foreclosure sale if they put up a $650,000 bond, which they were unable to do.
In its response to the Strand lawsuit, Wells' attorney wrote: "Plaintiffs failed to investigate readily available public information to determine the nature of the foreclosure sale. ... A simple review of the notice of sale and the recorded trust deeds would have revealed that the sale involved a junior position lien."
The lawyer said - and the judge agreed - that the auctioneer has no obligation to disclose whether loans being sold are first or second liens.
The first mortgage was auctioned on July 22 for $298,000; there were no bidders and the property reverted to Wells.
Wells and the family negotiated a confidential settlement and were finalizing details late last week.
Hayley Strand and Janbay now plan to move to Washington state.
"We bought the house to keep them close," Roberta Strand said. "What's really sad is I feel as if I'm losing my family."
Foreclosure auctions
Auctions called trustee's sales are held daily on courthouse steps throughout California. This is the final step in the state's foreclosure process. Most properties revert to lenders at these sales, but a handful go to investors. Here are tips for people interested in buying a foreclosed property at auction:
-- Engage a real estate attorney and/or a professional investor.
-- Hire a title company to make sure there are no liens.
-- Observe some auctions before bidding.
-- Research the property history at the county recorder's office or subscription websites like RealtyTrac and ForeclosureRadar.
-- Be prepared to pay cash.
-- Understand that the property has no guarantees on title or condition.
-- Consider buying a bank-owned property instead. These come with clear title. They are sold on the open market by real estate agents. Some go on the block at mass auctions in public venues run by professional auction companies.
This article appeared on page A - 1 of the San Francisco Chronicle
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