Have Not Seen This Before - 2nd Position Note

11 Replies

Here is one where I have reviewed this with 4 attorneys and none of them have seen this. A HELOC on a property whereby the seller sold the property and the lender agreed to a short sale. For simple terms lets say the 2nd lien was $50,000 and the short sale netted the lender $5,000 which had a deficiency balance of $45,000. The borrower signed a deficiency agreement acknowledging the debt and the release of mortgage that was recorded was clear the mortgage is released but the debt is not satisfied.

Seems like this was common 5-10 years ago. Here is the kicker, the original lender attempted to collect the outstanding debt, eventually charged it off their books (which does not wipe the lien its an internal accounting measure) and sold the note down stream. 

Still, this is extremely common. Here is the kicker: in the DD file, there is also a new note signed by the borrower for the deficiency amount but the lender appears to be a 3rd party private mortgage insurance company. Add to it there was never a satisfaction for the note - so in reviewing the file there appears to be 2 notes for the same amount owed, and the borrower clearly does not owe double.

So whose note is valid? the original lender or the subsequent note?

@Chris Seveney   I seen a similar situation a few years ago when I attempted to do a short sale on a condo, but this was a 1st position note, and the condo at the time was worth around 20-25k.  Everything was agreed and was ready to close, then 5/3rd bank wanted the borrower to sign a deficiency agreement for the remaining debt.  This blew up the sale, the borrower filed bankruptcy,  gave up the condo to the bank, moved out and rented an apartment.  The condo is now vacant and 5/3rd bank hasn't foreclosed on it.  This was 2-3 years ago.  

I spoke to my neighbor about it who was an executive at 5/3rd.  He said they get the note for the deficiency amount and sells the note to a 3rd party for pennies on the dollar.  So instead of collecting the 18-20k, the bank did this and now has to foreclose to collect anything.  And btw this was Ohio so 5k+ to foreclose.  

Still shaking my head as I am typing this.  Now that I reread your post, it's not quite the same, but brought back some memories :) 

@Chris Seveney If the 3rd party loan was taken out to pay the deficiency on the original loan, then there must have been some sort of payoff to the original lender. You should be able to track down the wire, which is proof of the payoff. If this actually happened, the original lender should issue some sort of satisfaction of the deficiency part of the debt. Then the 3rd party loan is the only one left standing.

@Adam Walter Banks do stupid things all the time, no surprise, haha!

At the end of the day, people make the best decisions when it's their actual money at stake, not someone else's.

@Chris Seveney you know I am not a note guy, this is just conjecture.  Theoretically neither note is valid. The original lender agreed to a release. They then sold a note that not secured by real estate.

Of course this is subject to the what you call a second note from a mortgage insurance company. Is that truly a Note and truly secured by the property? If no money transferred at the time of the signing of the 2nd note it might not be legally valid.

Even if I am right cleaning it up might not be worth the trouble.

Ned

the mortgage would not be valid but the note still is in effect as it was not released, it is just an unsecured loan at that point in time.  You are correct in that its not worth the headache. I was just mentioning hear on BP as in the note space we see some crazy unique things

@Gary Headrick wrote
    The one that is recorded first

Despite what I said above BOTH could be enforceable until overturned by the court. I can see a scenario where the second one is valid and not the first. 

@Chris Seveney yes I see now, The note is valid if that is what you are buying.

I was thinking you were buying a first and wanted to know if the HELOC was a valid lien. But my bad, It wouldn't matter if you were the first.

Now a serious risk to you is if the mortgage insurance company paid off the HELOC lender, or subsequent note holder. Then in return for paying them off, got the owner to sign a new note and mortgage. The note you are buying could be worthless and the newest recorded note and mortgage would be valid.

@Don Konipol Exactly, haha! You would think that people would understand that principle. If you apply it to so many situations, you could clearly see how mis-aligned incentives (even when the original intentions are good) can screw everything up.

If the original borrower signed a note for the balance due upon the home, why did he give up the home?  Is anything stamped or initialed upon the back of the note?  Was it deposited or endorsed by anyone but the person who was on the hook for the note?  Did the original lender still have the original note and was it in it's original condition?  I do not understand why, if the second note was made to cover the original note's loss, the original note would have any value at all.

Of course, I'm just some random guy who thinks most loans are not exactly loans at all, unless the lender is a real person, providing his own cash to a borrower.