First lien foreclosed is second still good?

Question

Good Evening All

Ii am looking at a couple of 2nd position liens. The seller says that the first has already foreclosed if that is the case wouldn't any liens junior to the first be wiped out making the note worthless. Are there any scenarios why someone would still buy these types?

Thank you for any and all responses.

Joshua Andrews · Answer

You can technically make money on 2nd liens where the 1st is behind on payments or initiating foreclosure against the borrowers home. However, you need to pay pennies for this 2nd lien due to the high risk. If at foreclosure there is equity above the 1st mortgage, the remainder is paid first to any junior liens in line, then to the borrower in that order.

However, what makes this difficult is that typically when the 1st lien forecloses, they bid only enough to cover the amount they are owed, plus their legal expenses. This means it is likely the 2nd lien and all other junior liens will become wiped, or essentially removed from the property upon completion of the foreclosure sale.

Sometimes if the borrower is doing a deed in lieu with the 1st lien (essentially giving the property back to the lender without going through foreclosure), you can get a small fee from the 1st to release your junior lien. This is done to save the 1st from the legal expense and time of having to foreclose on you to wipe your lien. This strategy from an investor standpoint is hit and miss.

Focus on buying 2nd liens where the 1st lien is performing for best results.

Louis Kim · Answer

@Linda Hastings second mortgage holders are less likely to get paid when the first forecloses for because more times than not there isn't enough equity in the property to cover the high cost of foreclosure. Banks will typically have to take a 15-20% discount, then there's roughly 26% (S&P Report) in hard costs the bank will incur during the process. If the property owner has back taxes even less trickles down to the second.

The 2nd will most likely have to file for a deficiency judgment to recovery anything...if you've been foreclosed on you probably don't have much in cash, so in essence the 2nd mortgage holder ends up with nothing.

If the second mortgage is in default, then this changes things. The second mortgage holder can foreclose on the property, and acquire the property subject-to the first mortgage.

Roman M. · Answer

Exactly. They are no longer secured by the property so you technically buying an unsecured lien.

Sean OToole · Answer

@Dave LaPoint - Not sure what you mean when you say ForeclosureRadar won't show the status of senior liens. Though we always recommend verifying title before making a purchase, we will almost always show foreclosure activity on senior loans. If you mean current balance, that is credit data and can not be legally retrieved without the owners permission (which you can potentially get from them - ask nice ;-).@Louis Kim - Excess proceeds are only paid to junior holders, not senior. Since property taxes are super senior to loans in foreclosure, they are NOT paid out of excess proceeds, but instead remain a lien on the property that the new owner assumes. Perhaps the law is different in your DC, as I haven't reviewed the foreclosure laws there, but I've reviewed many states and never seen that. @Linda Hastings - You are correct about excess proceeds, but I don't think I'd buy seconds AFTER the foreclosure sale in the hope of procuring those excess proceeds unless I was super comfortable that the person selling the second wasn't aware of them and hadn't collected them; and that there were no other claims against them.

@Christopher Montgomery - @Roman M. was right that if the foreclosure has occurred they are now unsecured liens, so you'll be limited to collecting from the borrower, and subject to dismissal in bankruptcy. Note that you'll need to sue the borrower in order to collect, and that not all notes are collectable. For example a purchase money second, a seller carry back second, and purchase money refinances after 2013 can't be collected on after a 1st forecloses in California. Big picture, it's possible in certain instances that you could make money on those seconds, but it will be a long haul, require up front investments in law suits against the borrowers, and require those borrowers to recover enough from their foreclosure to have sufficient assets to actually pay you within the time allowed to collect on your judgement. There are likely easier ways to make a buck.

Vinod Dasani · Answer

@Christopher Montgomery - There is a difference between when a property has already been foreclosed on and in pre-forclosure.  My understanding is that when a property is foreclosed then all other liens are wiped out (if the amount is less than what is owed on the 1st lien).  Thus, in your case if the property has already been foreclosed (as you indicate in your post) then all other liens are null and void.  Also, during a Title search if there are any liens you will find out just in case you have any doubts.

Dave LaPoint · Answer

Louis and Joshua (and others),

Thank you for the expert advice on the OP's question.  I'm in a similar situation in CA, where a 2nd is going to trustee's sale and I'm thinking of bidding on it.  However, my goal isn't to make money on the 2nd, but rather to get into position to assume the debt on the 1st lien and actually buy the house.

My question is, how do you find out the disposition of the 1st lien ahead of time?  Can you tell if it is already in foreclosure or not?  Sites like Foreclosure Radar indicate the position, but not the status of the senior lien.

The 1st lien looks like it is for about $780K, and the 2nd for $100K, yet the home could likely fetch $1.3M on the open market.   (Property taxes are in arrears, too.)  It's tempting to buy the 2nd lien to try and assume the debt of the 1st, but, it would be nice to know that the 2nd could be redeemed if that doesn't work out. Your caution on that strategy is appreciated, and any advice you have would be appreciated as well.

Christopher Montgomery · Answer

Thank you all for your input. I thought maybe this is not a common occurrence; however I have been doing some due diligence on seconds (have not purchased yet, but am doing research on one's for sale) and I am finding that some sellers are selling seconds that are either in foreclosure or have been foreclosed on. I guess I am asking; knowing the situation why would someone still buy knowing these variables..Is there opportunity in buying notes this way?

Again thank you all for your input

Louis Kim · Answer

@Linda Hastings there are companies out there that do what I said above they buy nonperforming seconds to collect the fees or to foreclose on the property.

My experience with preforeclosure  searches has shown me that more times than not someone with substantial equity finds a way to reinstate the loan.

Also I would think if you're a second holder on a home where the first is being foreclosed with enough equity to cover the balance would you sell at a discount to guarantee repayment?

Linda Hastings · Answer

Thanks @Louis Kim. I guess what I was getting at was whether there would ever be a case when someone would still buy these seconds, as asked by the OP. The only reason I could think of was if there was a good enough equity position that the second could still get paid (even partially, depending on how much of a discount you bought at) after the first was satisfied. Perhaps that isn't a very common scenario though.

Linda Hastings · Answer

Forgive me if this is a total newbie question as I'm not well-versed on seconds, but if the first forecloses and the property is sold for more than the UPB of the first, wouldn't the rest of the proceeds from the sale (minus legal expenses, etc for the first) go toward paying off any junior liens? If so, then wouldn't the second only be "worthless" if the FMV of the property is less than or roughly equal to the UPB of the first?

First lien foreclosed is second still good?

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