Why do Banks Buy Mortgages in Bankruptcy

10 Replies

I am looking at a property that has been tied up in a chapter 7 bankruptcy for a couple years. The property value is likely below the debt against the property. It appears that Seterus bank took the mortgage as the owner was going through default. Operating under this assumption I am hesitant to negotiate with the bank because I do not understand the banks incentive. Any thoughts?

Originally posted by @John Wood :

I am looking at a property that has been tied up in a chapter 7 bankruptcy for a couple years. The property value is likely below the debt against the property. It appears that Seterus bank took the mortgage as the owner was going through default. Operating under this assumption I am hesitant to negotiate with the bank because I do not understand the banks incentive. Any thoughts?

Several reasons. The loan may be backed by FHA or VA and there is no loss to the bank if the borrower defaults. Also, they may be able to buy the loan from the other bank for pennies on the dollar. Another is that they expect the borrower to reinstate and the interested rate is high enough to be of benefit to the bank.

Quite a few misnomers here in my opinion. No one can do anything while in BK until and unless the trustee releases their claim to the property. No sale, no negotiation, no nothing until that happens. IF it happens, it's usually only so the lender/bank/servicer can proceed with foreclosure and only foreclosure (usually). Even WITH trustee approval, the lender/bank/servicer still isn't going to talk to you about a sale because they don't own the property!

The "Bank's" incentive? Incentive to do what, negotiate? Again, they can't negotiate. Won't negotiate unless they own the property. They can only own the property if it went through foreclosure sale and did not sell at auction and reverted back to the beneficiary, which if that happened would more than likely mean it's not a government loan or GSE loan because, they usually handle their own REO's and not the servicing entity (Bank/servicer/lender). I'm saying more than likely, not always.

There can most definitely be a loss to the bank if the borrower defaults. They lose servicing income. They lose interest income. They may have to buy the loan back (If it's a government or GSE loan). Also, the days of selling a note to another bank on an individual basis are more urban legend than reality these days and no, it won't be for pennies on the dollar, it will be fair market value minus a factored haircut amount based on expected yield/return.

Your post was kind of vague to opine on anything substantive. Do you have more details?

Thanks @Mike S. That helps me understand where the bank is coming from. 

Also @Ron S. thanks for pointing that out. I'm new and still working on the vernacular. So to clarify, I've been talking to the trustee but I would like to negotiate a short sale since the debt owed is greater than the property value (hence why i want to talk to the bank). The borrower is not in a position to be reinstated. What I am trying to learn is under what circumstances the bank would agree to such a proposal, especially when they were not the servicer before the bankruptcy.

I'm still uncertain which additional details are relavent (suggestions??) but I am going to talk to the trustee and hopefully the bank today to get more.

Thanks again!

Originally posted by @John Wood :

Thanks @Mike S. That helps me understand where the bank is coming from. 

Also @Ron S. thanks for pointing that out. I'm new and still working on the vernacular. So to clarify, I've been talking to the trustee but I would like to negotiate a short sale since the debt owed is greater than the property value (hence why i want to talk to the bank). The borrower is not in a position to be reinstated. What I am trying to learn is under what circumstances the bank would agree to such a proposal, especially when they were not the servicer before the bankruptcy.

I'm still uncertain which additional details are relavent (suggestions??) but I am going to talk to the trustee and hopefully the bank today to get more.

Thanks again!

It would be a very very uncommon situation for you to be talking directly with the trustee negotiating the purchase of a property in BK. The trustee will normally actually engage an agent that the debtor and the creditor agree with (Or don't disagree with) and, only upon a hearing where the trustee is proposing to sell potentially non exempt assets, which according to your post, does not appear to be the case because the value isn't there above the debt. The trustee would simply abandon the asset if there is nothing for him/her to sell to pay other creditors. it doesn't make sense in my experience for a trustee to sell on behalf of the BK, a property that is underwater.

The bank would never (Maybe not NEVER but 99.99999%?) agree to a proposal where they would deal directly with you as a buyer because A) they don't own it and B) even if they somehow in a one in a million chance were directly negotiating with you, why wouldn't they instead expose the property to the open market  for maximum price? it defies logic. It probably violates any investor servicing covenants.

I'm assuming you are using servicer and bank as one in the same. If instead you mean there is a servicer that services the loan, and a bank that owns the loan (Not the property) but doesn't service it, you're still gonna have to go to the servicer as that is what the bank pays the servicer to do, to be the gatekeeper from people that think they can just call the bank and negotiate a purchase on a property they don't own.  (Maybe you mean the note instead? )

If the property is subject to BK protection, you have to wait until it isn't or, until the trustee has engaged an agent and then talk with the agent who will talk with the bank.

If the property is not subject to BK, you have to wait until the borrower engages an agent or encourage them to engage an agent or, wait until the bank forecloses if they don't engage an agent and then buy it at auction or, buy it as an REO if it doesn't sell at auction.

I cannot think of a scenario in my 25 years in this business, of a bank negotiating a purchase with a buyer on a property the bank does not own, or a trustee negotiating directly with a buyer. No way the bank would approve it from my experience. No way a bank would risk that kind of scrutiny to deal directly with a buyer.

Originally posted by @Ron S. :

Quite a few misnomers here in my opinion. No one can do anything while in BK until and unless the trustee releases their claim to the property. No sale, no negotiation, no nothing until that happens. IF it happens, it's usually only so the lender/bank/servicer can proceed with foreclosure and only foreclosure (usually). Even WITH trustee approval, the lender/bank/servicer still isn't going to talk to you about a sale because they don't own the property!

The "Bank's" incentive? Incentive to do what, negotiate? Again, they can't negotiate. Won't negotiate unless they own the property. They can only own the property if it went through foreclosure sale and did not sell at auction and reverted back to the beneficiary, which if that happened would more than likely mean it's not a government loan or GSE loan because, they usually handle their own REO's and not the servicing entity (Bank/servicer/lender). I'm saying more than likely, not always.

There can most definitely be a loss to the bank if the borrower defaults. They lose servicing income. They lose interest income. They may have to buy the loan back (If it's a government or GSE loan). Also, the days of selling a note to another bank on an individual basis are more urban legend than reality these days and no, it won't be for pennies on the dollar, it will be fair market value minus a factored haircut amount based on expected yield/return.

Your post was kind of vague to opine on anything substantive. Do you have more details?

 While a borrower is in bankruptcy, a bank can indeed negotiate the amount owing, terms and conditions of a lien secured against a property owned by the borrower. The whole point of bankruptcy is debtor relief and to try to work out a solution to a very tough problem for all involved. Any changes require court approval. If the court determines that the changes are in the interest of the estate and debtors, he is likely to agree to the changes. One can also buy a house that is in bankruptcy. The offer has to be submitted to the court and be approved, that's all. (It just takes painfully long and requires appraisals and approvals and motions and trustee agreement and money.)

Originally posted by @Mike S. :
Originally posted by @Ron S.:

Quite a few misnomers here in my opinion. No one can do anything while in BK until and unless the trustee releases their claim to the property. No sale, no negotiation, no nothing until that happens. IF it happens, it's usually only so the lender/bank/servicer can proceed with foreclosure and only foreclosure (usually). Even WITH trustee approval, the lender/bank/servicer still isn't going to talk to you about a sale because they don't own the property!

The "Bank's" incentive? Incentive to do what, negotiate? Again, they can't negotiate. Won't negotiate unless they own the property. They can only own the property if it went through foreclosure sale and did not sell at auction and reverted back to the beneficiary, which if that happened would more than likely mean it's not a government loan or GSE loan because, they usually handle their own REO's and not the servicing entity (Bank/servicer/lender). I'm saying more than likely, not always.

There can most definitely be a loss to the bank if the borrower defaults. They lose servicing income. They lose interest income. They may have to buy the loan back (If it's a government or GSE loan). Also, the days of selling a note to another bank on an individual basis are more urban legend than reality these days and no, it won't be for pennies on the dollar, it will be fair market value minus a factored haircut amount based on expected yield/return.

Your post was kind of vague to opine on anything substantive. Do you have more details?

 While a borrower is in bankruptcy, a bank can indeed negotiate the amount owing, terms and conditions of a lien secured against a property owned by the borrower. The whole point of bankruptcy is debtor relief and to try to work out a solution to a very tough problem for all involved. Any changes require court approval. If the court determines that the changes are in the interest of the estate and debtors, he is likely to agree to the changes. One can also buy a house that is in bankruptcy. The offer has to be submitted to the court and be approved, that's all. (It just takes painfully long and requires appraisals and approvals and motions and trustee agreement and money.)

I think everyone on this post understands its with trustee approval (Which is why I actually had the words, "Trustee Approval" in my post). I think everyone understands the whole point of bankruptcy as well. I also believe everyone understands that while the bank can negotiate (If they receive approval to do so), they don't negotiate a sale directly with the buyer but instead the buyer/seller's agent(s).

Originally posted by @Ron S. :
Originally posted by @Mike S.:
Originally posted by @Ron S.:

Quite a few misnomers here in my opinion. No one can do anything while in BK until and unless the trustee releases their claim to the property. No sale, no negotiation, no nothing until that happe

ns. IF it happens, it's usually only so the lender/bank/servicer can proceed with foreclosure and only foreclosure (usually). Even WITH trustee approval, the lender/bank/servicer still isn't going to talk to you about a sale because they don't own the property!

The "Bank's" incentive? Incentive to do what, negotiate? Again, they can't negotiate. Won't negotiate unless they own the property. They can only own the property if it went through foreclosure sale and did not sell at auction and reverted back to the beneficiary, which if that happened would more than likely mean it's not a government loan or GSE loan because, they usually handle their own REO's and not the servicing entity (Bank/servicer/lender). I'm saying more than likely, not always.

There can most definitely be a loss to the bank if the borrower defaults. They lose servicing income. They lose interest income. They may have to buy the loan back (If it's a government or GSE loan). Also, the days of selling a note to another bank on an individual basis are more urban legend than reality these days and no, it won't be for pennies on the dollar, it will be fair market value minus a factored haircut amount based on expected yield/return.

Your post was kind of vague to opine on anything substantive. Do you have more details?

 While a borrower is in bankruptcy, a bank can indeed negotiate the amount owing, terms and conditions of a lien secured against a property owned by the borrower. The whole point of bankruptcy is debtor relief and to try to work out a solution to a very tough problem for all involved. Any changes require court approval. If the court determines that the changes are in the interest of the estate and debtors, he is likely to agree to the changes. One can also buy a house that is in bankruptcy. The offer has to be submitted to the court and be approved, that's all. (It just takes painfully long and requires appraisals and approvals and motions and trustee agreement and money.)

I think everyone on this post understands its with trustee approval (Which is why I actually had the words, "Trustee Approval" in my post). I think everyone understands the whole point of bankruptcy as well. I also believe everyone understands that while the bank can negotiate (If they receive approval to do so), they don't negotiate a sale directly with the buyer but instead the buyer/seller's agent(s).

 You say: "If the property is subject to BK protection, you have to wait until it isn't or, until the trustee has engaged an agent and then talk with the agent who will talk with the bank."

Actually, that is not accurate. The bank has an attorney who represents them in court and I have worked directly through the banks' attorney to get approval to buy a property with no real estate agent involved. Just another little trick to put in your back pocket in case the occasion arises.

@ Mike

(yawn) Which is why I also put in my post, "99.9999% of the time". Sure, you can find the one in a million proverbial needle in the haystack but let's be realistic, your scenario is what's possible while mine is what is probable. Maybe it's different in Southern California but in my area and nationwide where I've managed portfolios in bankruptcy for the last 25 years, that's what happens.

Thanks @Mike S. for the trick. It's a pretty complicated problem given my experience level but I'm able to take my time on this one and I'm having fun. I'll let you know how it goes.

I'm going to have to agree with @Ron S.   @John Wood -  highly unlikely you ever get any opportunity to negotiate with Seterus. They don't own the property, and why would the bk court bother to get involved in a short sale during a BK as it provides no additional proceeds to distribute. Not going to happen. Wait until the CH 7 is over ( Or Seterus pulls the house out of it)  - the owner will still own the house. If he wants to sell to you in a short sale then, he can. 

As to your question why would Seterus buy a defaulted note? They buy plenty and for a single purpose - to make money. Ultimately even if the owner is discharged from the note, Seterus still has the lien on the property and will eventually liquidate.

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