holding a Non-Performing note; What would you do?

Question

Hello BP,

I have been reading a lot lately about note investing and am understanding more about it yet I am unsure of the next step for my situation.

I have a note for 15000 from 2005ish that was paying well, then the borrower went to jail and I have not seen any payments in a long time.  As far as I know, the wife is current on the first, she is not paying me though.

I have spoken to an attorney and was basically told there was nothing I could do. After reading the topics on non performing notes I am thinking there IS something I can do. I am in a financial situation now(somewhat) that I could foreclose ...

What should I do? Threaten foreclosure to hopefully get them paying again, or sell the note? or any other options?

I have also heard that you can sell a second to the first mortgage holder. Not sure how true that is.

Home is worth about 140k. Borrower purchased in 2003 for 146k. I am unsure where they are at ton the first right now.

Thanks in advance

Todd Miles · Answer

Thanks for the detailed response. For sure this was something that I was involved in before knowing all the ins and outs of this. My lawyer did send official documents and attempt to have some communication about possibly modifying the terms but there was no response. I will contact a lawyer that definitely knows more about all this.

Thanks for some clarity.

Dion DePaoli · Answer

@Todd Miles

Listen to what Bill is telling you and frankly disregard most of the rest as background noise.  Trying to use Dave's podcast as directions to disposition your note neglects important details of your note situation.  Dave knows what he is doing and talks about things in the podcast, but don't take the podcast out of context, he wasn't talking specifically to you about your note.  The details matter, who is on title, who signed the security instrument, etc, etc. 
	 
	 It is actually pretty simple, borrowers go delinquent on payments all the time.  The response from the mortgagee is demand for payment and any applicable fees per the note.  That is step 1 for every note.  What Bill also referred to is, if you fail to pursue collections, the note may lose it's collectability.  Now, I doubt you are close to that event, usually it takes two years in general. (hopefully anyway)
	 
	 I think you may discover you also have some other issues and I also suggest as well, you find an attorney who will do a little more explaining and is very familiar with mortgage law in Georgia.  Georgia requires a license to hold a mortgage as an investor, not having that license can be used in foreclosure defense, not to mention simply getting in trouble from the regulators.  You may be exempt if you have been the Mortgagee since 2005, I am not sure for Georgia.  Acting as a Mortgage Servicer can also have some consequences if you are trying to collect incorrectly and servicing the debt without a license as well.  Did you make the loan or buy the loan, was it properly originated.  When a loan goes into default, all the details matter, don't take hipshot advice.  
	
	The takeaway from this, notes are becoming less and less DIY and you need to ensure you have your ducks in a row and you are complying with federal and state regulations or the lesson may be very costly.  Much of this can be accomplished by speaking with competent attorney's in real estate and putting your loan with a properly licensed mortgage servicing company.  Talking with the state department of finance is also not a bad idea if clarity is needed.
	
	The fact that the borrower is incarcerated does not set aside the obligation on the debt.  It also does not stay any collection attempts, provided they are carried out properly.  
	
	I do not understand what "not in a position to foreclose" actually means.  Also, the statement seems to ignore that the first response to borrower delinquency is NOT foreclosure.  So, to that regard, you would not be in a position to foreclose since you didn't actually make demand properly and allow suitable time to cure.  If it was meant as a financial barrier, sending out a demand notice usually is not that expensive, some paper a stamp and an envelope is usually within everyone's budget.  Albeit, the letter itself should be drafted by a properly licensed attorney or mortgage servicer for your state.  This could be as simple as the wife doesn't know your debt exists and only knows of the first lien, so notice will cause payment.
	
	The idea that you can simply wait to see what happens is not wise.  The idea that you should run off and take a haircut by selling your note right now is not prudent, you will simply lose money.  The idea of trying to do anything with the senior lien holder is premature.  Alienation or Due on Sale does not seem to matter for your situation and I am not sure you even understand what those clauses do.  You really need to go get some legal help and stop doing the DIY here before you get yourself in trouble or lose money.  It, unfortunately, is pretty clear you have never done this before, and it seems you are to some extent spinning your wheels on what you think you are looking for and looking to do to create a resolution.  Good Luck.

Todd Miles · Answer

I just listened to the podcast. It seems like from what Dave was saying is you could foreclose and take over payments on the first. So essentially I could rent it out to make payments, or work on selling/short selling.

This home is right down the road from me and I feel confident that it would be a great rental, or would sell for more than the first.

Any thoughts would be appreciated.

Bill Gulley · Answer

If you snooze you can lose. :)

Todd Miles · Answer

thanks guys.

Bill I guess you answered something I was thinking about which was just to let it be until they sell and they'd have to pay me off but I guess now I do need to check into "alienation laws" in GA.

Thanks

Account Closed · Answer

Todd,

You can sell the note for 10% of the principal and let someone else have the headache.

Joe Gore

Bill Gulley · Answer

Welcome Richard, good point, that may be it, but an attorney that doesn't know the difference in collecting a debt and harassment shouldn't be his attorney for this. Could be it's not worth going after.

Keep attempting collections, look to your state laws as to alienation  of the debt, if you fail to actively collect it might looked like you walked away.

If it is underwater you may have to wait, just keep it active, eventually something may happen where the note will be paid off, in full or in part. :)

Richard Cohn · Answer

Todd,

The key question is, is the house underwater? You say the house is worth $140,000 but you don't really know the amount of the first mortgage. What was the original amount of the first mortgage? That will give you a start point.

Here is how I interpret part of what the attorney is saying.You mortgage may be properly secured legally, but you may have no security financially. If you foreclose the amount that the house goes for at foreclosure sale may not even be enough to pay the first mortgage.

Todd Miles · Answer

The note is for 15,000 and it is a second with a couple years payments on it.

The note is properly secured. I think the attorney said I couldn't do anything because at the time I was not in a position to foreclose.

She was also concerned about specific laws about "harassing" the wife(her name is not on the note). Does this sound right?

I will definitely listen to the podcast, That thread is actually what got me to resurrect this issue.

I would assume it would be better to get the note performing again than to just sell at a discount?

Bill Gulley · Answer

Jason, I agree that he needs to engage the borrower, however making any new terms will constitute making a new loan requiring the note and the note holder to comply with the new laws, he can end up doing more to damage his position than help. Dave can do that as they have a broker's license. He needs an attorney. :)