Thank you in advance if you make it to the end of my ramblings here.
I’m wondering about the possibility of another wave of foreclosures as a result of the housing crisis. How can I take advantage of it, and how can I help someone that might otherwise fall victim to it? The details that I have here are from a brief conversation last night so please bear with me.
I was talking with a friend of mine last night who is on the verge of having to sell his rental before the bank begins proceedings to take it from him. There are a few thoughts I’d like to discuss. But first a little background:
My friend bought this property near the height of the market somewhere around 2005-2006. When the market tanked, he was able to move into a bigger house and turned this property into a rental. 7-8 years ago he was advised to play "Hardball" with the bank and was told to stop making payments on the second loan because the bank wouldn't accept any short sale offers. The second was charged off, he has been making payments on the first and has been able to keep the rental and his primary. Now, six months before the charge off is scheduled to come off of his credit report the bank is playing hardball back and threatening to foreclose on the house unless he pays them $14,000. He doesn't have $14,000 and from the way it sounds the bank isn't giving a guarantee that this payment will be the end of it. (The charge off was for close to $45,000) Also this could potentially hit a reset button on his credit score and screw him up for another 7 years so he is feeling a lot of pressured to sell. The property is probably worth $300,000 and is somewhere between 60-70% LTV. Because his credit is still recovering from the charge off and because of the lien he hasn't been able to find anyone willing to refinance or even get a hard money loan so now he's talking about selling the property. At this point its had renters in it for 7 years so it undoubtedly needs a little work inside.
My first thought is this: He can’t be the only one facing this dilemma. There has to be more people looking to sell for a similar reason. I want to take advantage of this situation. I know that there are lists of pre-foreclosures available but I don’t know where to find them.
My second thought is: I don’t want to offer on my friend’s property. His friendship is more valuable than that to me, but if there’s a way that I could help him keep the property I would like to try.
Do I understand your post correctly, the 2nd mortgagee charged off a $45k loan? Did they 1099 your friend? Where does the $14K number come from?
If it is charged off, it is dead to the lender, however, a collections agency might have purchased the old note and are trying to make a move--just a thought. Depending on the state in which the property is located. there are often two parts to the loan; a note (personal liability for repayment) and the mortgage (attaches to the physical property as collateral for repayment).
If it is indeed the original lender trying to open up the charged off loan (note) and foreclose on the mortgage, tell your friend to hire a good real estate attorney who is experienced in foreclosures to deal with the lender. That can hang them up in court until the next bubble bursts -- hopefully many, many years from now.
I've charged off countless notes when repayment became unlikely, only to wait it out until value came back so I could make a demand against the borrower and foreclose if they didn't pay the demand. Unless they reconveyed the lien, they have every right (And probably every intention) to come back after the property in the absence of payment. Yes, they may have referred it to an outside agency for collection. Yes, they may have sold the note but unless someone has a deed of reconveyance in their hands, they risk foreclosure if they don't pay.
You can go ahead and hire an attorney. We (lenders) usually prefer that so that the emotion goes out the window, and the logic of the situation stays in the forefront. Yes, the attorney hired can file a TRO, and probably get a hearing but at the hearing, the judge is going to ask, if the note was paid back per the terms of the agreement. They are going to ask if it was reconveyed. If not, all things being equal, that TRO is going to get thrown out and then the noteholder is going to add all of their attorneys fees to the balance and continue with their foreclosure. The other attorney that was hired is going to add their fees and when the dust settles, it will probably be more than the $14,000 the noteholder is currently demanding.
If you owe the money and can't pay it, or borrower it, or sell something to obtain it, my two cents would be to sell the property and move on to the next chapter of your life.
That's a good decision to make to not mix friendship with business. That is a formula for many movies.
As @Ron S. said, “charging off” is an internal accounting thing.....not a “relieving the borrower of the debt” thing.
I'm not completely sure, but I think that's purely between the bank and the IRS.. they took a tax writeoff on the loss. They could still collect it later - it would just count as income for that year.