Short Sales on 2nd mortgage
Question about podcast 106 with Mike Sumsky
If borrower is behind and the property is worth 100k.They owe 75k on 1st Mortgage and 35k on 2nd Mortgage, the interviewee on the podcast said he will get the 2nd Mortgage for $1500 because lender won't get anything in a auction. Couldn't the 2nd just foreclose? Couldn't they bid up the price in the auction to cover their debt? Why would they accept that?
The interviewee also said they short sale the 2nd mortgage and took over the 1st Mortgage subject to?
How do you short sale a 2nd Mortgage?
What is a buyer buying and why?
Thanks in advance
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#1 Foreclosures Contributor
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There's definitely some BS in some of these podcasts. Trust me, there is no such thing as a sub2 combination short sale. A sub2, then negotiate a short pay off as the title holder....maybe, but not common.
If the second foreclosed, and set the starting bid at what they're owed, its likely nobody would bid and the second mortgage holder would get the property. Its not really a "subject to" deal, but the first mortgage is still in place. The first mortgage holder would get notified during this process and will be fully aware. And is unlikely to work with the second lienholder.
If the first forecloses, the second could get some money if the bids cover the first mortgage and costs of the foreclosure. So, they could indeed send someone to bid and try to get the price up. They do risk actually winning the bid, though.
Whether the second would accept a small payment rather than take their chances in some other way depends on their evaluation of the deal. In this case, a $1500 payment seems unlikely to work. But who knows. If they were willing to accept $1500, the deal would be written to give enough cash to fully pay off the first and give the second their $1500. So something like $76,500 plus whatever's needed for other costs. The buyer would get the property and both the first and second would get paid off.
I am not sure what was said in the podcast but dealing with information in the original post a couple of things:
1. The property is worth $100k - so there is a sizable recovery potential for the second lien if the first is only $75k. I am not sure a competent mortgagee in second position would sell off what looks like $25k in recovery (a little less perhaps by enforcing) for $1,500. In a nutshell, we can assume they stand to recover $15k. After they plug say $10k to enforce the lien or protect their interest. For the record, it would not be unthinkable that a property worth $100k sells at auction for $85k. So the claim that the second lien holder can not recover seems a bit faulty.
2. A short is simply when a Mortgagee accepts less than the amount due. Any debt can be "shorted". A "Short Pay" is 'paying' the Mortgagee off for less than what is due while the Borrower retains title. A "Short Sale" is 'selling' the property, a new party takes title, and the Mortgagee taking less than what is due.
A short sale approved by a second would mean the first is either paid in full or the sale alienates the first while the second takes less than what is due. This is because the term "sale" means a new party took title.
In line with what John mentioned, the second lien does not both take title and allow a short sale. It is possible the Interviewee is just using the wrong terminology for a Deed in Lieu but a Mortgagee does not 'pay' for the property since they already lent money secured by the property. In other words, a Mortgagee is not party to a sale in that manner.
The second could take a Deed in Lieu of Foreclosure and such an action could make them Subject To the first lien. There are concerns with this practice as a DIL can cause a merger of interest in the real property and negate the security and superiority to other claims that the Mortgagee had prior.
I am guessing the Interviewee is implying that they DIL the property and then as title owners service the debt of the first lien in hopes the first lien does not take action for being alienated on title. Meaning the first lien could foreclose regardless of debt service being current because title transferred to a new party. That is the Due on Sale clause. So the strategy is risky if you can not pay off the first lien, you stand to lose once they foreclose.
