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Clifton Powell
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Pre Foreclosure, stalled by BK

Clifton Powell
Posted Oct 16 2018, 10:11

Good morning!

I am trying to figure out what the best thing to do for a friend is in the situation outlined below:

Home Value $570k

owed 1st mort $496k (current loan was modified and principal reduction completed for $100k reallocated in form of balloon payment at end of loan term)

no 2nd

arrears $30k

In process of going through bankruptcy, however, want to complete a lease with option to buy.  The fear is that there is a trustee assigned and 3 other debts included in the NO.  We have permission from homeowner to be placed on title to assure our ability to purchase.  

Would it make sense to negotiate with the lender direct as opposed to letting trustee work with them? Can we remove the home from the BK?

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Andy Mirza
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Andy Mirza
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Replied Oct 16 2018, 10:35

@Clifton Powell I wouldn't do anything unless you get clearance from your friend's BK attorney. He would know what you can and cannot do. It does not make sense for you to contact the lender directly. You cannot remove the home from BK.

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Brett Goldsmith
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Brett Goldsmith
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Replied Oct 16 2018, 11:35

That'd be a principle deferral modification, not a reduction. Do you have a payoff showing that $496k is what is truly owed including the deferred amount?

Is this in a ch 7 or a ch 13?. 

Bankruptcy questions should be asked to the attorney who is representing the seller. Typically you can motion for a BK case to be dismissed, but these sort of things depend on many factors.

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Tom Gimer
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Tom Gimer
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Replied Oct 16 2018, 17:02

We see similar fact patterns every so often and without fail the deals blow up.

If I understand the situation correctly, as a result of some mod program the loan amount has been reduced so the payment is affordable. However, some amount is moved to the back end as a balloon and there is now a 2nd lien. Per the terms no monthly payments have been being made, but there is a valid lien which is payable upon refi, resale, or at the end of the term. 

Of course the owner didn't read the paperwork they signed so they go under contract thinking only of the 1st they are making payments on.

Total debacle once the facts are discovered.

Before going one step further I would be absolutely sure there is "no 2nd" because it is just as likely that there is a 2nd... it just isn't getting paid monthly.

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Andy Mirza
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Andy Mirza
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Replied Oct 17 2018, 11:08

@Tom Gimer I haven't seen any loan mods that establish second liens. Typically, the loan mods that I've seen from the banks and hedge funds involve "deferred principal," and only modify the note and not the Deed of Trust or the Mortgage. Usually, the Unpaid Principal Balance (UPB) stays the same and all of the arrears, additional interest, fees, etc. are added together and become the new "deferred principal balance." This does act as a balloon payment although it's not formally called one. The deferred balance does not incur interest, penalties, or late fees but just sits there until it gets paid off and often times does not have a due date. I suppose, in theory, that a borrower could pay down the UPB to zero and not make further payments on the deferred principal until he sold or refinanced the property.

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Tom Gimer
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Tom Gimer
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Replied Oct 17 2018, 11:37

@Andy Mirza One of the Making Home Affordable programs... 2MP or something similar. Anyway I've seen this at least 20 times. The borrower is clueless that they have an open 2nd.

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Andy Mirza
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Andy Mirza
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Replied Oct 17 2018, 11:51

@Tom Gimer I was not doubting you, I've just never seen it done that way before and all of the loan mods I've seen were done the way I described. I learned something new and I'll be better prepared in case I see these in some future pool. 

Seems like it makes things more complicated by adding a second loan/lien to the situation. I wonder what the logic was behind doing it that way.