Negotiating cancellation of debt on 2nd mortgage

6 Replies

I am looking at a sub2 deal with the following details:

1) Motivated seller that understands sub2 deals

2) 1st mortgage with rate of 2.75% 30 year ARM (loan is current)

3) 2nd mortgage (originally a HELOC) has been in default for 5 years & was already charged off (a charge off means the lender is no longer in collection mode, wrote off the debt, but does NOT equate to the debt or lien against the property being canceled as some people think). The servicer maintains the debt in-house and did not assign the debt for outside collection or to an attorney. They also stated they will not foreclose.

4) Seller's credit is already damaged, has more than one repo, foreclosure, and is insolvent, therefore, there would be zero tax liability for the seller from the cancellation of debt income/forgiveness of debt

Given the above, I have every incentive to keep the 1st and take the property sub2.The road block is the 2nd. The servicer of the 2nd requires full financials from the seller and claim they will not accept less than 50% of the balance which is unacceptable (seller already inquired, but never went through with it). I have had two other deals in which the 1st mortgagee canceled the debt 100% and the seller was insolvent, so no taxes owed for him either. Talk about a windfall for both parties! Why on earth would a 2nd, whose already charged off, and that's been in default for 5 years, still expect 50% settlements?

The way I see it, I have two options to try and force this stubborn 2nd mortgagee to cancel or at least discount the debt to 10% or less:

1) Hire a flat-fee attorney experienced in negotiating settlements on 2nds, especially one experienced in negotiating short sales.

2) Put the 2nd mortgagee through a short sale by having the seller short sell the property to me. The question is - can that be done by keeping the 1st mortgagee excluded from the short sale?

All input and advice welcome and appreciated.

[No legal advice given]. I cannot imagine that you could get the 2nd mortgage holder to agree to any low percentage settlement if they are aware that your intend to carry on paying 100% of the 1st mortgage, and I would be surprised if any enforceable contract could be made with the 2nd Mortgagee without reference to the Sub 2 of the (ongoing) Mortgage 1.  It might be do-able IF you can pay out mortgage 1 as part of the purchase price? (My guess:- not want you wanted to hear). If I find out I am wrong, then that is how I learn. Cheers...

Why on earth would a 2nd, whose already charged off, and that's been in default for 5 years, still expect 50% settlements?

Because "he has a LIEN that must be paid off whenever the property is sold" and he can afford to wait!

Originally posted by @Brent Coombs :

[No legal advice given]. I cannot imagine that you could get the 2nd mortgage holder to agree to any low percentage settlement if they are aware that your intend to carry on paying 100% of the 1st mortgage, and I would be surprised if any enforceable contract could be made with the 2nd Mortgagee without reference to the Sub 2 of the (ongoing) Mortgage 1.  It might be do-able IF you can pay out mortgage 1 as part of the purchase price? (My guess:- not want you wanted to hear). If I find out I am wrong, then that is how I learn. Cheers...

 You mean it might be doable if I pay off the 1st as part of the deal?

Originally posted by @Tim Silvers :
 You mean it might be doable if I pay off the 1st as part of the deal?
Yes, that's what I mean. Curious to know the numbers (total owed by the 1st then 2nd mortgage, vs the asking price, vs  rehab costs, vs ARV)?  Cheers...
Originally posted by @Brent Coombs :
Originally posted by @Tim Silvers:
 You mean it might be doable if I pay off the 1st as part of the deal?
Yes, that's what I mean. Curious to know the numbers (total owed by the 1st then 2nd mortgage, vs the asking price, vs  rehab costs, vs ARV)?  Cheers...

 1st: $135K

2nd: $115K

AP: $175K

ARV: $200K

@Tim Silvers , my understanding would agree with Franks that even the 2nd lender "has a LIEN that must be paid off whenever the property is sold". In any case, those numbers you provided do NOT appeal to the investor in me, even if the property requires no repairs to be worth the ARV (unlikely). Even if you could get the 2nd lender to officially write-off 90% of their owed funds, that will still mean you are paying more for the property than the 70% investment 'rule' mandates. Why would you even bother still being tempted?

You wrote: "1) Motivated seller that understands sub2 deals". That's a laugh really, because the Seller and the OWNER are not the same entity once there is sub 2 clauses.  You also NEED to deal with the OWNER (ie. the holder/s of those sub 2 Lien/s!) and you alreadyknow you cannot force them to yield to your 10c in the $ proposal. (The Seller knows this, but is looking for a Buyer who doesn't)! [No legal advice given]. Run!

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