Foreclosure from a second position

17 Replies

Hello All!

I read an article by Dave Van Horn about a second position foreclosure:

http://www.pprnoteco.com/ezine-116-4-26-14/

In there he says that it may make sense to do so but does not elaborate on the outcomes. I asked him to comment on the article but he did not respond hence I am asking here.

What happens if:

  • a property FMV is $200K
  • 1st lien has UPB of $210K and is current
  • 2nd lien has UPB of $20K and is more than 90 days late
  • 2nd lien-holder files for a foreclosure
  • now what?

I understand that the second lien-holder may start foreclosure process but what does he gain from it? If the property is sold for $200K shouldn't the first mortgage be satisfied first thus wiping second one off?

Thanks
Nick

It will:

1) give the owner a wake up call and they'll negotiate something

or

2) You'll end up with a judgment you can pursue, for whatever that's worth. Assuming these are recourse loans, and a deficiency judgment is allowed.

Let's say the owner decides to default on both mortgages and the loans are non recourse.

The 1st lender does not know it yet but the 2nd has just filed for a foreclosure.

What happens then? Does the 2nd lender have any advantage over 1st considering that the 1st loan in not yet 90 days behind and cannot start they own foreclosure?

No advantage, their mtg is still in place. No one in their right mind will be bidding on a $200k property, with a $210k plus mortgage. You're only hope would be a couple of dummies who don't realize there is a first.

Then I don't understand the following quote from the article:

"Probably the most common misconceptions deal with taking over the property ‘subject to’ a senior lien, which is a little different as a lender, since we don’t have to buy out the first lien in full. We rarely ever payoff a first lien; in fact, we rarely ever make a monthly payment on the first lien. It’s even pretty rare that we reinstate the senior lien or bring them current..."

The bold sentence implies that foreclosing from a 2nd position somehow makes the 1st lender irrelevant or gives the 2nd some hidden advantage.


No, if it's referring to the 2nd foreclosing, which it may or may not be, that means in your case you just took over a negative equity property if you took it back at your 2nd mtg foreclosure. The bold face is just saying you don't pay off the 1st out of your pocket. If there was equity, above the first, you' d then just sell the property and keep the excess proceeds after paying off the first.

If I don't pay 1st lien out of my pocket, who does? I wish Dave could somehow see this discussion and chime in. Any way to invite him? He is registered on BP.

@Dave Van Horn

If I don't pay 1st lien out of my pocket, who does? I wish Dave could somehow see this discussion and chime in. Any way to invite him? He is registered on BP.

@Nick B. Read the last line of my post above. If there was equity, above the first, you could sell the property after you foreclosed and keep the proceeds after paying off the first. The first will get paid off at some point, or take the property to foreclosure auction.Since there is no equity in your case you'd probably just wait until the first foreclosed. If the second is a non recourse loan, you have less than zero chance of collecting anything. Your best hope would probably be for the seller to attempt a short sale with the 1st mtg cooperation/approval, and get maybe 10% of your UPB.

If I may chime in. Another thing that you would need to look for are any judgments, liens ( IRS, City, Mechanics, HOA etc....) that may have been filed. Some of these may remain with the property even after the 2nd forecloses. I suppose if the 1st was current, then the new owner of the 2nd "might" have some hope of the owner working something out with them....although that seems a bit doubtful as they did not work anything out with the previous holder of the note. Just remember, that it will only take a BK to wipe it out completely, no matter who owns it. One of my clients recently foreclosed on a 2nd that she held, and there were 4-5 judgements that ended up being ahead of her... one of which was a state lien. Fortunately there was enough equity in the property for her to sell the property, pay off the other liens ahead of her and still recoup her investment.

Hi @Nick B.

I do apologize that I was unable to get back to you until now—I was in New York for a Note Conference over the weekend, and then we actually had an event in-house yesterday, which took some preparation. That being said, I do want to address some of your questions. Thank you for reaching out!

For 2nd lien debt buyers, senior lien status is more important than equity. In the 2nd mortgage business, we don’t typically exit through the property; we exit through the homeowner. When the borrower is current on the 1st, this can mean two things: they have a source of income, and they want to stay in the property. Oftentimes, the borrower may not believe that a 2nd lien holder can foreclose. Also, a borrower, who is delinquent on their 1st mortgage, may be much more financially strapped than a borrower, who is current on their 1st but delinquent on their 2nd. Quite often, a 2nd lien holder is still able to create a work out agreement with the borrower post-foreclosure sale, if they are current on the 1st. This has often been the case for us.

Now, if you do foreclose from 2nd position, there are several options.

In most states, secured creditors have reinstatement rights to protect their interest, meaning that even if the borrower stops paying the 1st while the 2nd lien holder is foreclosing against the property, the 2nd lien holder can reinstate the 1st, keeping the loan current. The 2nd lien holder can rent out the property, or subsequently, sell it off.

If you choose not to keep the 1st lien current, eventually, they will most likely foreclose against you. Depending on the foreclosure timeline in the state you’re in, this could take several months or years, and you may be renting out the property during that time.

Regarding the statement in the article, when we foreclose from 2nd position, we always have an exit in mind. If the 1st was current, we would be working towards a work out with the borrower. If the 1st was not current and a work out is unforeseeable, we may or may not pursue foreclosure, as it is a case-to-case basis. If we do foreclose, we don't usually make payments to keep the 1st current or pay it off in full. Typically, we would either sell the property, or conduct a short-sale with the 1st, which is essentially negotiating a discounted pay-off with the 1st mortgage.

In reference to another one of your questions, if you are foreclosing from 2nd position, and the 1st is foreclosing is a few months behind you, the benefit in this is that you have control of the foreclosure sale.For example, the 1st is $100,000, and the payoff for the 2nd is $50,000. You would have control of the opening bid of the sale, so you may have it start at $150,000, in order to protect your interest.

I hope some of this info helps!

Best,

Dave

Thank you, @Dave Van Horn ! This is a great explanation and addition to the origianal article.

@Dave Van Horn Great post, thanks for this. 

Can you explain your last point? You said:

> For example, the 1st is $100,000, and the payoff for the 2nd is $50,000. You would have control of the opening bid of the sale, so you may have it start at $150,000, in order to protect your interest.

Why would you choose to open the bid at $150k instead of opening at $50k to take control and then buying out the first at $100k?

Hi @Nick L. ,

You are correct, you could start the opening bid at $50K but if they were to only bid $50K and win, they would gain a sheriff's deed for the property subject to the 1st lien that is still attached. At that point the 1st could foreclose against the property and take ownership unless they're paid.

I think my answer wasn't 100% clear, whoever bids would need to bid $150K to obtain the property free and clear.

Also keep in mind if the 1st were heading to foreclosure ahead of you, they would probably start with an opening bid of $100K since they're not concerned about any junior liens (which wouldn't affect them).

Hope this helps.

Best,

Dave

P.S.

If you have any more in-depth questions or still need clarity, I'm co-hosting a free Q&A call with my partner March 21st. We do these call every other month where we discuss a note topic and then open it up to the audience to any questions (even deal specific ones). You can find more info about this month's call here:

https://www.biggerpockets.com/forums/521/topics/41...

so I have a follow up question. Suppose a second lien (home equity line of credit) is going up for auction at a sheriff sale with a judgement amount of $50k. The first lien (a 30 year conforming loan) has already initiated the forclosure process and has an estimated judgement amount of $100k. There are no other liens and I estimate that the home is  conservatively worth $225k as is. Will the second lien opening bid be $50k or $150k? If I win the auction with a $51k bid, will the first lien bank be forced to enforce their due-on-sale clause and demand the remaining $99k? If I pay $151k at the sheriff sale, will the first lien holder automatically be paid back? 

@Matt Tang Check your state laws, but in most cases the first mtg would be entitled to any surplus from the 2nd mtg foreclosure, thus paying them off.

lost a property purchase because of this

second position is tough

if the bank or someone has liens on the property that are not showing up on the fire sale(auction) price listing and you get the property, the first position still has control of the property ie liens ect...

you will either have to pay them off or loose the property

I was fortunate about the deal even though I won the bid, lost my 1k but found that the property was not only in a trust but was also upside down another 10k by liens

make sure you do really good research, I would hate for someone to position themselves thinking they are going to make a cool 10k then find out they are going to have to pay a cool 25k because they got into a note that had a lien after they signed on the line

enjoy

Join the Largest Real Estate Investing Community

Basic membership is free, forever.