Foreclosure Facts: Foreclosure from the 2nd Position
Monday, November 05
One of the biggest misconceptions about 2nd mortgages is foreclosure. Foreclosing from the position of a 2nd mortgage or foreclosing from ANY secured lien position for that matter is totally possible. After attending this year's "Noteworthy" event in Las Vegas, NV, arguably one of the largest note conferences in the U.S. I was actually shocked at the number of people who didn't realize that you can foreclose from 2nd position (or 3rd, 4th, 5th, and so on and so forth). In fact, many of the note buyers at the conference (especially those who deal specifically in first mortgages) found 2nds to be unappealing and refused to work them because of this misconception. If people in the note business don't realize this small fact, it really helps to explain why borrowers don't believe this is possible as well.
Our company, PPR, specializes in buying delinquent second mortgages nationwide and it's nothing short of amazing sometimes that homeowners are adamant that as long as they're paying their first mortgage that they can't lose their home to foreclosure. Nothing could be further from the truth. Once the legal process gets moving they usually start to realize that yes indeed they can lose their home to a junior-lien holder. *Just a little disclaimer, PPR initiates foreclosure on about half the loans we buy (mostly as a tactic to initiate borrower contact), but we ACTUALLY foreclose on less than 10%. We're in the business of getting workouts with borrowers and keeping them in their home, not foreclosure.*
The second biggest misconception is that the junior-lien holder has to pay off the senior liens. This is not true either. If we foreclose from the second position, we would get a sheriff's deed "subject to" the senior lien. The senior lien doesn't go away, but we would have to deal with them if they started to foreclose against us. In most states we have reinstatement rights and can often just bring the loan current until we can liquidate or lease out the property. If we sold the property we would pay them at that time. We also have the ability to try to buyout their position, possibly at a discount or to do a short sale, with or without the homeowner's authorization.
The third misconception is that the junior-lien holder will not foreclose if the property is upside down (This is where the borrower owes more than the property is worth). Many times we foreclose on upside down properties because their could be tax advantages to taking the loss or we could have a senior lien payment that is less than current market rent. In this case we would take title through a sheriff's deed, the Homeowner would relinquish the property and we would rent it out for more than the payment is on the first. Many times we get a workout with the Homeowner post-sale as well. Sometimes we also get more creative and do a rent-to-own or owner financing with a wrap-around mortgage. These techniques are a little advanced, but as you can see there's more here than meets the eye. Now this question is to you potential 2nd mortgage investor, now that you see you can control the short sale or take back the property "subject-to" for a small investment, do 2nd mortgages sound more appealing? And remember these are just some of the techniques that you can use in the less than 10% foreclosure rate, imagine the profitable win-win scenario you could create with a workout with the Homeowner!