Okay, the correct answer being 'C' is interesting.  But it doesn't sound equitable.  Somebody mentioned a probable title claim in an earlier response, and I agree with that assessment.  The attorney working for the foreclosing lender ordered a title search and the lien was missed.  Thus, the successful bidder (usually the foreclosing lender) is stuck with an asset subject to a considerable lien.  Seems to me a title claim is the first remedy.

Imagine if it were the junior lender foreclosing and not serving the dominant mortgagee (with the cyclist out of the picture).  He now has a house and a first mortgage while the foreclosed borrower walks off with roughly the balance of the first mortgage?  Crazy, I tell you.  Then again, title claim.