Maryland Home Improvement PSI Practice Exam

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?

1. The first mortgagee receives $60,000.

2. The second mortgagee receives $23,500.

3. The second mortgagee receives nothing unless he forced the foreclosure auction.

4. The former owner receives $4,500.

The correct answer is: The second mortgagee receives nothing unless he forced the foreclosure auction.

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