Team, I have a note that is reperforming and now seasoned and I am going to sell it. The borrower is way behind on her property taxes and is not in a financial position to pay them. My question is: do I pay all the property taxes now and then sell the note or sell the note at a reduced price and let buyer pay taxes? Does it even matter?
Gabe, In my opinion I think that it would be very tough to sell this as a reperforming note simply because there are delinquent taxes that need to be resolved. Most people (of course not all) look for performing notes to be clean cash flow. I would also think that will command a higher price if you pay them and then sell the note.
I agree with Wayne, you should get the back taxes resolved with the borrower. We have our servicer escrow taxes and when we have a note where there are unpaid back taxes, we pay them to the municipality and have our servicer add this "catch up" payment to the borrower's account (in addition to their regular incremental monthly payment for current taxes). You or your servicer need to contact the borrower to let them know that their payment is going to increase until that balance is paid down. Once you have this in place and some payment history, then you will be in a better position to sell the note.
I agree with Wayne and Bob. You will not get a good price on the note with the delinquent tax balance. A good performing note should be current in terms of payment schedule (paid current, with no back payments due) and taxes should be paid current. Ideally, a tax escrow payment has already been established on the account to help ensure taxes remain current going forward.
Bob's approach will work if the borrower agrees to the large escrow payment. The up side is that you are not cash out of pocket with the approach. The down side is that it will take some time to get the tax balance paid off. It is a good way to go if you are simply holding the note in your own portfolio.
In a situation like this where a marketable note is the end goal, I will typically look to advance the taxes and mod the loan to include the advance and any other arrears that may be on the account. As part of the mod I will insist on a tax escrow. This solution will produce a marketable loan more quickly. Another approach is to pay the taxes and forebear the advance. The end result is not as clean but overall it is better for resale purposes than selling with a delinquent tax balance.
I should have added that with the tax advance + mod option, your advance is included in the UPB of the modified loan, so when you sell your will be compensated for the tax advance (minus whatever discount % you are offering).
From the details in the post this loan is not a candidate for attempting to add the advances to the balance of the loan. The Borrower can not afford the property if they are barely making the P&I payments. Adding the advance to the balance of the loan would create a less than favorable position for the Mortgagee.
When a Borrower fails to maintain taxes and/or insurance (among other ideas) the Mortgagee can make an advance and then the Mortgagee can demand repayment. Failure to repay those advances gives the Mortgagee a right to accelerate the entire loan balance. Adding those advances to the loan would remove the Mortgagee's right to accelerate. This means any new Mortgagee or the existing one would have to wait another year for the same situation to arise to be in a position to take action they are currently in now.
It is not clear if the Borrower has any capacity to increase their income in the future. I get the impression it is not a high chance. If that is the case, I would advance only those taxes due which might result in a tax cert sale and issue a demand to the Borrower to repay. When the Borrower fails to repay the advance it would be time to accelerate the loan and start a foreclosure process. That can include some attempts of loss mitigation ideas like DIL or Sale (short?) etc.
The last comment in the post makes it sound like this is too much of an obligation for the Borrower. If they are "barely" making P&I, then taxes and perhaps insurance are not too far from falling into perpetual non-payment. Further, this financial situation does not speak well for property maintenance issues that will arise nor future tax and insurance increases as the market continues to recover. Moral of the story, the Borrower can't afford this property. While that is sad and nobody (hopefully) wants to displace a Borrower for the sake of displacement, sometimes a Mortgagee has to make the correct decision and not the comfortable one.
While not all secondary mortgage market investors are the same, if I were reviewing this loan I would not be too far above an NPN price. Maybe..."maybe"...a smal premium on top of NPN price but not much. That is because, that is what it really is. I think sometimes newer note investors want to slap some lipstick on a loan and act like things are all good. Clearly here, they are not. Payment seasoning often get's treated like lipstick. Buyer beware.
Further, adding any advance to the balance will more than likely not be recovered in a secondary market sale. The discount applied to the loan will also cause the additional balance (which was the advance) to have the same discount. So if you advance $5k and the loan gets a 65% bid the same 35% discount applies to what you just advanced. You only get back $3,250. The only way you are really recovering is based on what your cost basis is in the loan to begin with.
Moral of the story here. The best disposition here is likely not selling the loan. Work the loan through full disposition which may include DIL, Sale or Foreclosure. Marketing the loan may just be an exercise in time wasting.
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