Non-performing Junior lien notes are becoming less readily available

26 Replies

I would like to start buying non-performing junior lien notes and I was wondering, with the financial crises far behind us, if anyone had a feel for what the supply of these notes will be over the next 1, 2, 3 and 4 years?

Does anyone have an idea as to the kind of notes that will offer the next great opportunity? 

Reverse mortgage notes will be readily available soon, imo.

Kudos,

Mary

Hi David,

In my experience supply ebbs and flows to a larger extent with 2nds. Again this is just an opinion and what I see in the marketplace, but I believe there will be a supply in the coming years which will taper but not dry up completely. Will there be a wave of 2nds like there was several years ago, at rock bottom prices? Probably not. But you can always switch over to NPN 1sts. There will always be people defaulting on their 1st mortgages. It's just part of life.

Josh

I think you will see a good inventory of 2nd position NPLs. 

A total of 3,262,036 HELOCs with an estimated total balance of $158 billion that originated during the housing price bubble between 2005 and 2008 are still open and scheduled to reset between 2015 and 2018. Of these, 1,834,588 (56 percent) are on residential properties that are seriously underwater, meaning the combined loan to value ratio of all outstanding loans secured by the property is 125 percent or higher. 

With the home underwater, they borrower will not be able to refinance and so a large wave of defaults are expected to occur over the next 2 years

See full article at:

http://www.realtytrac.com/news/mortgage-and-finance/heloc-resets-report/

Thank you, Bob, for the very useful info.  I will definitely read the article.

So I've been buying properties that have first liens in default at trustee sales in California, but have not touched the ones with junior liens. When you guys are talking about buying junior liens, are you talking about the same thing?  Are these properties with the junior lien defaulting?  If I buy a junior lien does that mean I can just go and try to foreclose it? 

Also, it's been hard to find the exact amount of the 1st lien and the payoff (when junior lien is up for auction). I can see through title when the lien was taken and how much it was for, but how do you find out what the payoff amounts are? There could be huge penalties that have accumulated over time if the borrowers was defaulting on both the senior and junior liens. 

HELOC's are not the fodder of 2nd lien street level inventory. Most HELOCs are held in portfolio and as such do not trade down to the street all that often. Closed end seconds are what the masses have chased as many of those were pooled and sold into securities to be unwound in defaults. Most street level investors couldn't handle a HELOC with it's capital commitments. That is aside from the regulatory risks of selling to non-banking entity which is under fire even in the institutional market right now.

Yes payments can reset but banks have tools which can combat probability of default and delinquency on those accounts.  The event is known and will be dealt with by and large with out a huge new supply of second liens hitting the street.  Further, those loans which do get set to trade will likely stay in capital markets and not even consider the street all that much.  

So what I am saying is, I think you will indeed see a drying up of second liens as a street level investor.  In 4 years the market will be less than what it is today.  The inventory that most street level folks are playing with just aren't the same assets and those piggybacks are fleeting in their market share.

Originally posted by @Derek T. :

So I've been buying properties that have first liens in default at trustee sales in California, but have not touched the ones with junior liens. When you guys are talking about buying junior liens, are you talking about the same thing?  Are these properties with the junior lien defaulting?  If I buy a junior lien does that mean I can just go and try to foreclose it? 

Also, it's been hard to find the exact amount of the 1st lien and the payoff (when junior lien is up for auction). I can see through title when the lien was taken and how much it was for, but how do you find out what the payoff amounts are? There could be huge penalties that have accumulated over time if the borrowers was defaulting on both the senior and junior liens. 

 Yes, we're talking about the same thing. I bought a bunch of condos at trustee sales a few years back and verifying the position of the foreclosing lien is crucial, as you know. It's definitely safer to buy only when the 1st lien forecloses but I've bought a couple of properties at trustee sale when the 2nd foreclosed and I came out ahead.

The best way to know the UPB on the 1st is getting in contact with the borrower, establishing rapport, and asking them for this information. I was never  able to do this prior to a trustee sale and I think it might be difficult given the mental state of many facing foreclosure but not impossible..

You really have to do your best to estimate the loan balance on the 1st using whatever information you can get. If you know the original balance of the loan and origination date, you can make some assumptions for interest rate and length of the loan and generate an amortization chart. Make some further assumptions depending on the situation and you can get a ballpark idea of the balance.

One trick I used was to look at previous NOD's or NTS's on the property. They'll list the default amount on the NOD and give you the entire amount due in the NTS. (Applies to California.)

Hey Andreas, thanks for the response.  So now I've purchased two properties where we bought the 2nd, and the 1st still in place.  Wasn't able to establish rapport with the original owners who wouldn't give up the last 4 of their social or let me get info on the 1st.  Now I'm trying to evict them and then eventually just sell or try and bring the 1st loan current and make payments or try and refinance it. Having a real tough time with the banks and having them work with me.  Is it because they want to try and foreclose too?  Is it because they can't legally work with me since I don't have the okay from the original borrower?  I don't understand why they wouldn't accept money from me. 

What ended up happening with those condos where you bought the second and came out ahead? Did you evict?  Did you ever get the pay off info? Did you sell?  Did you rent?  Let me know! Thanks!!!

Originally posted by @Derek T. :

Hey Andreas, thanks for the response.  So now I've purchased two properties where we bought the 2nd, and the 1st still in place.  Wasn't able to establish rapport with the original owners who wouldn't give up the last 4 of their social or let me get info on the 1st.  Now I'm trying to evict them and then eventually just sell or try and bring the 1st loan current and make payments or try and refinance it. Having a real tough time with the banks and having them work with me.  Is it because they want to try and foreclose too?  Is it because they can't legally work with me since I don't have the okay from the original borrower?  I don't understand why they wouldn't accept money from me. 

What ended up happening with those condos where you bought the second and came out ahead? Did you evict?  Did you ever get the pay off info? Did you sell?  Did you rent?  Let me know! Thanks!!!

 Yeah, it's difficult to deal with the banks when you're not the original borrower. I'm sure the bank is constrained by privacy protection regulations, other compliance issues, and customer service reps who know and can only work in a certain "box" that does not include the situations investors like you and I face.

One situation was a flip for me. We bought a condo at trustee sale for an HOA lien. The bank had the 1st and had filed an NOD. I contacted the trustee and reinstated the loan, had plenty of time. We waited 90 days and evicted the owner with no issues. (We waited the 90 days because a previous owner has 90 days to redeem in an HOA foreclosure in CA.) We faced two issues in escrow: because of the HOA lien foreclosure we had to do some extra searching to find a title insurance company willing to issue a policy; getting a payoff was an issue until someone at escrow obtained the last four digits of the SSN and used the bank's automated system to get a payoff.

The second situation was similar but this one we kept as a rental. I bought it at trustee sale for an HOA lien. The trustee sale for the bank's 1st was scheduled for 10 days later and I sweated my butt off trying to reinstate the loan. I don't know if I'd do it again. When you are not the original borrower, it takes a while for trustees and bankers to understand what you're trying to do. I did reinstate the loan and I contacted the bank and asked for info on paying the loan. They wouldn't provide me with any info without the original borrower's authorization. I never had any contact with her and she was in the wind.

I got to know a banker at a branch office, explained the situation, and told him that all I wanted to know was how much the loan payment was. He kindly told me that but nothing else. I already had the loan number so I just started making the payments to the bank. They accepted them. That was in 2013. I recently talked to a different banker that I'm friendly with and she showed me the info on her computer screen that showed the amounts for P&I and the interest rate. I constructed an amortization chart that helps me with my accounting and knowing the balance.

Coincidentally, I'm in communication with the bank regarding assuming the loan or, at the very least, changing out the insurance so that we're covered. We've been lucky that nothing's happened over the last couple of years but we've been paying into an escrow account for an insurance policy that I assume covers the bank and the previous lender but not us! It's something I should have handled a long time ago. They seemed receptive this time so I hope it works out.

Hope this was helpful to you. 

Hi Andreas, this is truly helpful.  It seems like you need a little bit of luck and a little bit of help.  I have no clue how to get the last 4 of the social from the original borrower and the title company doesn't either.  As for going to a branch, I went to a Wells Fargo branch and they had no clue at all what to do or who I could even talk to.  They kept saying that all they could do is place a call to Wells Fargo mortgage and hand me the phone.  Very frustrating!  

Both of my cases are interesting and different than yours in that the 1st doesn't have a NOD yet. Pretty sure it's not that the note is current. I think it's because in one case Wells Fargo owned the note on the 1st and 2nd, so they decided to sell the 2nd first. Then they will most likely file a NOD at some point.

The second case is something I'm not sure about. I don't know why the 1st hasn't filed an NOD. The original borrower did leak a bit of info to me that the 1st was at like 800k, even though it originally was a 650k note.

Question, when you say that you reinstated the loan, what does that mean?  Did you pay the fees and overdue balance to get the note current again, then start making payments?  Did you pay the minimum required to stop the foreclosure? 

Hi Andreas, so here is an update. I guess on one of my properties they actually did file the NOD on the 1st. I'm trying to figure out exactly how much I owe now. Maybe you can shed some light.

Original loan balance is 650K

according to foreclosure radar loan balance now at 715K

Default amount $261K

Does this mean if I pay $261K, this notice goes away and I can start making regular payments?  Does this mean after I pay $261K that the loan balance is now $715K?

Originally posted by @Derek T. :
 

Question, when you say that you reinstated the loan, what does that mean?  Did you pay the fees and overdue balance to get the note current again, then start making payments?  Did you pay the minimum required to stop the foreclosure? 

 Coincidence that you're dealing with WF. Both of my situations are/were with WF as well. If you have the loan number, a banker at one of the branches can access limited information about the loan but whether they'll provide that info is a different question.

Reinstating the loan is paying the minimum amount necessary to make the loan current. A payoff is paying the entire loan off thereby paying the contractual obligation in full so that the lender releases its lien.

Yes, I did pay the fees and overdue balance to make the loan current and I started making the payments. Reinstating the loan stopped the FC.  I found out what the payments were because I had the loan number and help from a friendly banker. 

Originally posted by @Derek T. :

Hi Andreas, so here is an update. I guess on one of my properties they actually did file the NOD on the 1st. I'm trying to figure out exactly how much I owe now. Maybe you can shed some light.

Original loan balance is 650K

according to foreclosure radar loan balance now at 715K

Default amount $261K

Does this mean if I pay $261K, this notice goes away and I can start making regular payments?  Does this mean after I pay $261K that the loan balance is now $715K?

I would suggest getting a copy of the NOD. Typically, it will tell you what the default amount is and that's what you need to make the loan current. The NOS will typically tell you what the payoff or entire amount due is. Once you get the NOD, contact the trustee and request a payoff and a reinstatement letter. For my situations, one trustee provided only the exact dollar amount needed to bring the loan current. The other provided a detailed breakdown of all the costs so that I could see the current principal balance, unpaid interest, corporate advances, etc. Very helpful. You'll be dealing with the trustee since it's in FC and not the bank until after the FC issues have been taken care of.

I hope you have equity in these properties. Are you planning to flip them or hold them as rentals? I hope it's the former.

For my rental situation, I was hopeful that I could work something out with WF but it's turned out to be frustrating and fruitless trying to work with them.

Originally posted by @Derek T. :

Hi Andreas, this is truly helpful.  It seems like you need a little bit of luck and a little bit of help.  I have no clue how to get the last 4 of the social from the original borrower and the title company doesn't either.  As for going to a branch, I went to a Wells Fargo branch and they had no clue at all what to do or who I could even talk to.  They kept saying that all they could do is place a call to Wells Fargo mortgage and hand me the phone.  Very frustrating!  

Both of my cases are interesting and different than yours in that the 1st doesn't have a NOD yet. Pretty sure it's not that the note is current. I think it's because in one case Wells Fargo owned the note on the 1st and 2nd, so they decided to sell the 2nd first. Then they will most likely file a NOD at some point.

The second case is something I'm not sure about. I don't know why the 1st hasn't filed an NOD. The original borrower did leak a bit of info to me that the 1st was at like 800k, even though it originally was a 650k note.

Question, when you say that you reinstated the loan, what does that mean?  Did you pay the fees and overdue balance to get the note current again, then start making payments?  Did you pay the minimum required to stop the foreclosure? 

The lender does not have to "work" with you of you are not the borrower and do not have an authorization to release.  However, CA Civil Code of Procedure 2943 does state that the lender must provide a successor in interest (you) with a beneficiary statement that gives all the relevant info such as balance/pay off, escrow amounts, insurance info, etc. and whether the loan can be assumed.  The lender has 21 days to respond.  Read the code and construct your demand letter from the info there.  

That being said, I once made six separate demands to HSBC and got to no response.  I went back to the borrower and paid them to sign an authorization to release that included the SS and account numbers.  I would think Wells pays more attention to legal demands than HSBC so you might actually get somewhere with a demand letter to them.

I might be able to help with the last four digits on the SS#.  Feel free to PM me.

@David Joselson  Sorry your thread got hijacked by those of use who have purchased sub2 senior liens.  There's a whole set of challenges when working with senior lenders, including how to get the darn payoff, how to reinstate, how to insure, etc.  Relevant to buying non performing seconds, but not really helpful about how to find and acquire such notes.  

Originally posted by @Jo-Ann Lapin:

I agree with Marie. 2nds are very much alive  and will continue to be as long as the state allows for them.

Maybe I'm missing something obvious but what does this mean?  Is there any state that doesn't allow junior liens? Is this an issue anywhere?

Originally posted by @Andreas Mirza :
Originally posted by @Derek T.:

Hi Andreas, so here is an update. I guess on one of my properties they actually did file the NOD on the 1st. I'm trying to figure out exactly how much I owe now. Maybe you can shed some light.

Original loan balance is 650K

according to foreclosure radar loan balance now at 715K

Default amount $261K

Does this mean if I pay $261K, this notice goes away and I can start making regular payments?  Does this mean after I pay $261K that the loan balance is now $715K?

I would suggest getting a copy of the NOD. Typically, it will tell you what the default amount is and that's what you need to make the loan current. The NOS will typically tell you what the payoff or entire amount due is. Once you get the NOD, contact the trustee and request a payoff and a reinstatement letter. For my situations, one trustee provided only the exact dollar amount needed to bring the loan current. The other provided a detailed breakdown of all the costs so that I could see the current principal balance, unpaid interest, corporate advances, etc. Very helpful. You'll be dealing with the trustee since it's in FC and not the bank until after the FC issues have been taken care of.

I hope you have equity in these properties. Are you planning to flip them or hold them as rentals? I hope it's the former.

For my rental situation, I was hopeful that I could work something out with WF but it's turned out to be frustrating and fruitless trying to work with them.

Not sure if we covered this in a previous thread on this topic, but make sure you get a break down of costs to reinstate, especially if there has been a NOD. I had trustee's service include $750 for "legal fees" that were related to a title issue but unrelated to the foreclosure action. I told them to take it out and they did and issued a new payoff statement the next day. Foreclosure fees are statutory, they can't just tack on anything they feel like.

Home Equity Loan Rules

  • In Texas, second mortgages and home equity lines of credit are treated as cash-out refinances. This means a second mortgage can only bring the combined loan-to-value ratio (amounts of first and second mortgages) to 80 percent. Borrowers are also only allowed to secure only one home equity loan per year and only one junior mortgage can be in place at one time. Texas lenders are also not permitted to require borrowers to pay debts with proceeds of second mortgages or home equity loans.



Read more : http://www.ehow.com/list_6830523_refinance-rules-texas.html

Originally posted by K. M.:

The lender does not have to "work" with you of you are not the borrower and do not have an authorization to release.  However, CA Civil Code of Procedure 2943 does state that the lender must provide a successor in interest (you) with a beneficiary statement that gives all the relevant info such as balance/pay off, escrow amounts, insurance info, etc. and whether the loan can be assumed.  The lender has 21 days to respond.  Read the code and construct your demand letter from the info there.  

That being said, I once made six separate demands to HSBC and got to no response.  I went back to the borrower and paid them to sign an authorization to release that included the SS and account numbers.  I would think Wells pays more attention to legal demands than HSBC so you might actually get somewhere with a demand letter to them.

I might be able to help with the last four digits on the SS#.  Feel free to PM me.

 Brilliant! That Civil Code Section and "successor in interest" was just what I was looking for. 

I started another post about my situation here:

https://www.biggerpockets.com/forums/70/topics/238...

but you're right, we hijacked this thread and I apologize..

K. M. if you don't mind I'm going to copy your post to the other thread and ask you another question there. (I'm having problems tagging people because of a slow internet connection.)

So here are the numbers for that junior lien I bought. Just got the payoff and reinstatement amounts. I can't figure out what the principle balance will be if I choose to just reinstate the loan. Here are the major numbers I'm working with.

Unpaid Principal Balance: $652,318.91

Total payoff amount: $816,335.37

Total interest: $98,845.47

Total Amount to Reinstate good through 11/12/2015: $271,256.66

Daily interest accrual: $46.22

Is it safe to say that after I reinstate the loan, the principle balance will be $545,078.71 ($816,335.37-$271,256.66)??

I feel like somehow something doesn't add up. Why does it state that the unpaid principle balance is $652,318.91, when the note was originally for only $650,000. Also, why is the reinstatement amount so high, if the total payoff $816,335.37 minus the loan balance $652,318.91 is only $164,016.46. Do you get a better deal if you pay off the entire amount? Is it possible that if I reinstate the loan at the $271k, that the principle balance will be still at the $652k?

Originally posted by @Derek T. :

So here are the numbers for that junior lien I bought. Just got the payoff and reinstatement amounts. I can't figure out what the principle balance will be if I choose to just reinstate the loan. Here are the major numbers I'm working with.

Unpaid Principal Balance: $652,318.91

Total payoff amount: $816,335.37

Total interest: $98,845.47

Total Amount to Reinstate good through 11/12/2015: $271,256.66

Daily interest accrual: $46.22

Is it safe to say that after I reinstate the loan, the principle balance will be $545,078.71 ($816,335.37-$271,256.66)??

I feel like somehow something doesn't add up. Why does it state that the unpaid principle balance is $652,318.91, when the note was originally for only $650,000. Also, why is the reinstatement amount so high, if the total payoff $816,335.37 minus the loan balance $652,318.91 is only $164,016.46. Do you get a better deal if you pay off the entire amount? Is it possible that if I reinstate the loan at the $271k, that the principle balance will be still at the $652k?

 If your payoff and reinstatement notices are confusing, the only thing I can suggest is to call the trustee directly to get a better breakdown of the costs. This may or may not work depending on the customer service rep and whatever info they've been provided, but IMHO it's your best shot. Your math is right but something's missing to explain why it doesn't add up.

Keep in mind that on top of the interest owed and principal payments due, they'll add in taxes and insurance that they've paid and any corporate advances such as pre-forclosure fees.

You need an itemized breakdown on the reinstatement amount.  Only a part of that will be principal and interest due that will reduce loan balance.  The rest of it will be fees.  Fees you've never thought of.  That property had code violations so there will likely be preservation type fees, even if the lender didn't do very much.  The lender has fees for everything, including having someone drive by the property to see if it's still there.

Call the foreclosing trustee and get an itemization.

I have the itemized list.  I guess, I'm still wondering why the numbers don't add up in terms of the payoff amount and the reinstatement amount. Is it the case you get a discount for paying off the whole thing, i.e, don't have to pay fees?  Or is it the case that the way the calculate the total payoff is different than the way the calculate the reinstatement?  The pay off amount is just the principle plus all the fees and interest that has accumulated.  The reinstatement is to get back to where it was when the loan started to default, i.e when the principle balance was lower than the original balance .

Reinstatement Paper:

Payments from 12/1/2010 to 2/28/2011 $4086.38     Total $12,259.14

Payments from 3/1/2011 to 5/31/2011 $4,106.62      Total $12,319.86

(keeps going)

Payments from 6/1/2015 to 11/1/2015  $4,112.69    Total $24,676.14 

Total payments added up are $245,058.49

Corporate advances: $24,555.76 

foreclosure fees add up to $1642.41

Total reinstatement is $271,256.66. 

Payoff paper

Principle balance $652,318.91

Daily interest $46.22.  (I know the rate is 2.25 above 1 year libor)

escrow advances $38,969.82

Lender paid expenses $24,555.76

Interest $98,845.47

Fees and recording and other trustee fees: $1,842.41

Total Pay off $816,335.37

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