Wrap Mortgage

9 Replies

We are working with a seller in foreclosure. There is quite a bit of equity in the home and it only needs minimal upgrades and repairs. The foreclosure sale date is fast approaching...only a few days left. The sellers want to sell to keep the foreclosure off their records and they want a little cash in their pockets. No problem. We have offered them a small amount so they can move on with their lives. The problem is that the sale date is so soon and the only way the bank will stop proceedings is if they (the bank) receive a PSA, HUD Statement and a copy of the earnest check. Again, no problem - except that we want to buy this house 'Subject To' and we know the bank will not accept this. They will see it in the contract and reject it.

We were planning on paying the arrears, then taking the house Sub-To. The only way I can think to do this is as a Wrap. We are giving the sellers $5K in cash to move which they need in their pockets at close. We are not adding any $$$ to make it a Wrap nor do we really want to pay anymore for the house. My question is can we do a wrap without actually adding a seller financed mortgage to this so it just technically is a wrap but not really. In other words the amount of the original mortgage would be as it is now.

We have planned to use a third party escrow company to make the payments to be sure they get made to the bank. HELP!

Its either a wrap or subject to. What you describe is a simple subject to with no wrap. You are going to send the existing lender whatever amount they want to cure the default, hand the seller $5000, and take over ownership of the house. You will then begin making the payments on the existing mortgage. That's a subject to deal, plain and simple.

Thanks for your response. Yes, what we want to do is subject to. My worry is that I'm fairly certain the bank will reject the psa if it says sub to. My question is, can we call it a wrap (so the bank accepts it) even though there's no added mortgage amount?

We have thought about adding a very small amount, say $1-2k to make it a wrap. Any thoughts?

A wrap is Also a sub 2. Apparently someone contacted the bank about a "sale", which in their minds is a full cash pay off of the loan, which is why they are looking for the PSA and HUD. You could risk just sending the bank the arrears amount to bring it current, if they'll accept that, then make the regular payments, but you're still in a sub 2 situation, with the due on sale risks.

A wrap can be for the same amount as the underlying mortgage. No need for it to be different.

If you're trying to do a subject to or wrap and you send that contract to the bank they're going to reject it. They won't agree to either approach.

What you're trying to do won't involve the lender at all in the purchase process. Your only involvement with them is to send them the money to bring the loan current. I've never done a deal like this, and I do believe there is significant risk to you. The lender is going to want to see the money and then they will decide if they will accept that money and cancel the foreclosure. I suspect that may take some time and they may say no. So, you would want to do that first and then only close on the house once they cancel the foreclosure. If they don't, you get your money back and the deal is over. If they do, then you can close on the subject to purchase.

The risk is that the seller reneges after the lender cancels the foreclosure. Your recourse is then limited to suing them to force the sale.

You might be able to structure the deal as a loan to the seller with a lien attached to the house. So, step 1 is to loan the seller the money and record a deed of trust for the loan. Now the seller brings the loan current. Now you buy the house from them, subject to the existing mortgage and you forgive your loan to them.

That does have tax consequences for them because forgiven debt is income and is taxable.

Ideally what you want is to do a single closing where you give some cash to the seller and some to the lender and the lender agrees to cancel the foreclosure. Trouble is that would be part of your purchase of the house and there's no way the lender is going to be OK with you buying it.

Perhaps someone who's actually done such a transaction will chime in. @Bill Gulley maybe?

Just take it sub2. Get title company to request amount to catch up and wire instructions. Have closing agent collect money to catch loan up and you start sending payments to lender next month. Change address with bank to yours so you get statement. Get proof of insurance to bank with you as new additional insured. Get a authorization to release from seller to use later with bank. We do it all the time. No need to wrap.

Here are several docs you should consider obtaining from the bank:

1) Demand for Reinstatement - Let escrow request this document. This will provide you accurate cost-to-cure figures as of, and good thru, a certain date

2) Request for Beneficiary's Statement of Condition - this will provide you the total outstanding debt balance, including unpaid principal, amount and number of remaining payments, etc.

3) Promissory Note - although the borrower may have this, people in foreclosure tend not to be well organized (really?). Irrespective of whether you merely buy the property subject-to this loan or WRAP all or some of the sellers equity around this old loan, you'll want to know the terms of the loan encumber your new property.

Subject-to deals, as they relate to avoiding/reducing chance of triggering a due on sale clause can be found elsewhere in this and other forums.

Tip: tell escrow not to disclose what type escrow (sale or refi) to lender. None of lender/servicer's concern and should not be provided to them, only funds to reinstate (cure) foreclosure.

Well, Overland Park ain't in California, you're in Kansas and may well be with a Missouri based lender.

In FC I'd suggest the only demand you make is for a release of lien with a payoff, otherwise, make "requests".

You will likely have the loan continued in FC or accelerated to maturity again with Jason's strategy, that worked for us with several major lenders, not all, but there is a big difference between a bank dealing with a registered lender servicer and dealing with an individual investor or LLC.

Actually, at this point you're probably too late. Messing with a bank in a FC process and causing a delay, especially by deception can get you nailed!

I'd suggest you get a HML on the matter or another investor and just buy it at 5K over the payoff.

Of all cities to be messing in FC deals in the Midwest KC would be the last place since every banker around knows the number to the Regional HUD director I'd suspect. A HUD investigator can investigate your involvement right after lunch. Just to let you know, these investigators have powers of arrest and carry side arms.

As to a wrap, what Jon mentioned is pretty much on target.

Several other ways too, buy the note and get a deed, cash for keys.

Another way is to have the owner give the deed to the lender and buy from the lender.

There are other threads here on getting between a bank and a borrower in FC, late in the game the safest way is to just pay the bank off. If you can't raise the money I suggest you chalk it up as experience and move on.

It wouldn't hurt to fully disclose your plan to the lender, if you can show the ability to carry off the plan they may allow it to be brought current, but if you're not solid as to ability and experience don't bet on it. The borrower should be asking for that meeting and both of you go together. If it's a local lender and you may contact the loan officer who will have contact with the asset manager. The originator needs to be involved if it's a portfolio loan. But, if this is a secondary market loan, simply servicing retained, your chances are slim and none IMO.

There are investors who are unaware of the new Dodd-Frank and related FC laws and then there are some who simply ignore federal laws, but I suggest you abide by the new laws. :)

Originally posted by @Jon Holdman :

A wrap can be for the same amount as the underlying mortgage. No need for it to be different.

If you're trying to do a subject to or wrap and you send that contract to the bank they're going to reject it. They won't agree to either approach.

What you're trying to do won't involve the lender at all in the purchase process. Your only involvement with them is to send them the money to bring the loan current. I've never done a deal like this, and I do believe there is significant risk to you. The lender is going to want to see the money and then they will decide if they will accept that money and cancel the foreclosure. I suspect that may take some time and they may say no. So, you would want to do that first and then only close on the house once they cancel the foreclosure. If they don't, you get your money back and the deal is over. If they do, then you can close on the subject to purchase.

The risk is that the seller reneges after the lender cancels the foreclosure. Your recourse is then limited to suing them to force the sale.

You might be able to structure the deal as a loan to the seller with a lien attached to the house. So, step 1 is to loan the seller the money and record a deed of trust for the loan. Now the seller brings the loan current. Now you buy the house from them, subject to the existing mortgage and you forgive your loan to them.

That does have tax consequences for them because forgiven debt is income and is taxable.

Ideally what you want is to do a single closing where you give some cash to the seller and some to the lender and the lender agrees to cancel the foreclosure. Trouble is that would be part of your purchase of the house and there's no way the lender is going to be OK with you buying it.

Perhaps someone who's actually done such a transaction will chime in. @Bill Gulley maybe?

 You seem really experienced, perhaps you might have an answer to my weird question over here on BP? 

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