2nd Liens, BPO, and Equity

7 Replies

Hello,

I am in the due diligence phase of buying a performing 2nd lien note.  The homeowner has been in the property for 15+ years and is current on the 1st and 2nd mortgage, which is good.  I did a BPO (as this is my first 2nd, probably did not need to) but how worried should I be that the BPO value came in a lot less than the combined UPB on both the 1st and 2nd combined (therefore, no equity in the home at all)?  I know for 2nds that you focus more on the borrower than the property, but do people worry about that (no equity on a 2nd)?  Thanks in advance.

@Mark Welp
While I do not invest in seconds - if I was in this situation I would be worried. If the person loses their job or a down turn in the economy you are wiped out. Question I would ask myself is how much did I pay for this and what is the risk vs reward. If you paid for it as if it was performing and had equity then yes- if you bid it based on it being upside down then it’s risk vs reward. Based on your initial message it does not appear you bid based on the house having negative equity

I recently learned that the safest seconds are those where the first is performing, and there is enough equity to cover both the first and second position. It's riskier if there is no equity, but obviously not quite as risky as it would be if they were not paying. The person who explained this to me only invests in seconds that fall into the "covered by equity" category. I'm a newbie, but thought it might be helpful to pass that along.

Originally posted by @Mark Welp :

Hello,

I am in the due diligence phase of buying a performing 2nd lien note.  The homeowner has been in the property for 15+ years and is current on the 1st and 2nd mortgage, which is good.  I did a BPO (as this is my first 2nd, probably did not need to) but how worried should I be that the BPO value came in a lot less than the combined UPB on both the 1st and 2nd combined (therefore, no equity in the home at all)?  I know for 2nds that you focus more on the borrower than the property, but do people worry about that (no equity on a 2nd)?  Thanks in advance.

 Obviously, yes. If there really is no equity or It's close (5k-ish) and they file for bankruptcy, you can be stripped. But I think you're misunderstanding what that means.

The way you phrased it isn't clear. Combined LTV isn't as important as equity above the first.

100k house, 120k first, 40k second = no equity

100k house, 90k first, 40k second = partial equity, shouldn't get stripped

You don't need "equity in the house", you need equity that protects your position. The more you have the better since you would recoup more at FC sale/REO but it sounds like you're buying a performing note.

Thank you for the responses. Even though it is performing, I will probably pass. If something happens to borrower, i will get stuck with nothing. Thanks!!

Originally posted by @Mark Welp :

Thank you for the responses. Even though it is performing, I will probably pass. If something happens to borrower, i will get stuck with nothing. Thanks!!

While I'd agree with you if Patrick's example above applied, but, what if that house is valued at $200k rather than $100k (where the 1st and 2nd were the same amounts as in that example)?

If the owner stopped paying, wouldn't the whole country need to go down the gurgler before your non-performing 2nd note would be worth nothing? 

I suppose what I'm really asking is: Do you even know its equity? [Not financial advice].

Thanks Brent!

Mark,

Can you provide numbers for the 1st 2nd and BPO?

It may be more helpful to get the answers your looking for and help others in the same boat.

Jeff V

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