Buying a note - Deal or Dud?

Question

Seeking advice from more experienced note buyers. I've been offered a 1st position, non-performing mortgage that has the following status:

There's a second of +/-50k. Home value is about $53k. I realize I will have to foreclose to collect ROI. What other considerations are there?

The seller is offering this note to me for $16k. Deal or Dud?

Wayne Brooks · Answer

Defendants on a foreclosure suit, and in almost al suits, in Florida have always been required to respond in 20 days. If they don't respond, then plaintiff can file for a Default Judgement against the defendant. Once this is entered, and if the defendant never shows up, then it can proceed fairly quickly, depending on the back log/scheduling in that particular court division. But, a Default Judgment is not the end all some believe. They are routinely vacated if the defendant later shows up to defend themselves. And, some judges here anyway, still require the plaintiff to show evidence of possession of the note at foreclosure filing, standing, etc. even when the foreclosure is not defended. As @Dion DePaoli said, it's unusual for the second to be satisfied, if it was. The only time I've seen it is just after the $25B national mortgage settlement, the large lenders were writing off/forgiving/releasing a bunch of under water 2nd's, to burn through their required $25B forgiveness/spending quotas.

Dion DePaoli · Answer

Yes, Marshall Watson went down in a blaze of glory. I use to use them back when they were around but about a year and half prior to their close, they were not very good at their job. I am slightly concerned your referenced title report is not a proper one or two owner title history of ownership and encumbrances. Usually those reports are closer to $100 as a pretty standard price. The price you list of $35 is pretty below the fairly common industry price. Just be sure you go back at least one owner and get a full abstract for liens and encumbrances. I don't know what you are talking about with 21 day idea. When you file a foreclosure complaint in Florida, you will have to serve the parties through process or public notice. Just because the prior complaint did not get responded to doesn't mean the time on this compliant will be shortened in the favor of the plaintiff. This is a new complaint, it all starts over. A shorter time would be less equitable to the defendant. Additionally, I do not think you mean "defaulted", the borrower is already in default, that is what provides you the pursuit of foreclosure. I think you are confusing a new law which allows for a fast track foreclosure if the property is proven abandon. Logic dictates that an abandon property foreclosure doesn't experience a foreclosure complaint response from the defendant (borrower). So complaint is still filed. Process still takes place. Then your attorney would file to prove the property is abandon and file motion for summary judgement based on the property being abandon. That process can reduce the total time down to around 90 to 150 days depending on court schedules, etc. If the property is not deemed abandon by the court, the acceleration to summary judgement will not be granted. I notate the description is vacant. A vacant house is not necessarily an abandon house. The suggested exit strategies sound more like inexperience folks just tossing out what they believe they know. There is nothing in this loan based on this post that would remotely have me thinking a modification is something you want or even likely. I am having a hard time thinking the borrower here has any motivation to cooperate and a short sale would require that as well as a modification. So I would say do not spend too much time on those ideas and continue down the FCL path. You will exit the loan at auction and either get paid or get the property. If you get the property, you can sell it or rent it, etc. The second mortgage being satisfied is a surprise. I do not fully understand how this claim is made with no title report. The satisfaction should be recorded in public record. Perhaps this was not really a second line in the first place but rather the last first lien they had. Again, some of this might be being convoluted by conversations with the Seller opposed to verified on title reports. That said, the story there has some background merit. How recent is the SAT might tell a story about the borrower's presence and willingness to want to stay in the property (ownership wise). That second lien could have been discounted for payoff. I have a hard time believing a borrower shells out $50k to pay off a second lien and then leaves the first to default. Just as an additional supporting idea, the borrower seems to have made roughly 60+ payments. The balance is pretty close to where it should be based on those regular payments being made. In other words, evidenced by the UPB it doesn't seem like any prepayment occur. So while not impossible but rather in the ranks of less likely, I don't see this borrower all sudden posting the significant cash needed to pay down the second lien. I would look for the time period this SAT took place and then look to the servicing records of the first. See what was happening. A borrower satisfying a junior position should have triggered somebody looking at this at the previous mortgagee or servicer office. Any satisfaction of this second lien post default, even if shorted and certainly in full is concerning. There is a story here, not sure how much I have have stumbled my speculation onto of it but I think I would certainly get a better understanding of this idea and event. With that, happy diligence. Who needs True Detective when we have such entertaining mortgage files to play with?

Chris Martin · Answer

Next payment due: 9/1/2009. And the note holder has not foreclosed because... ? I'd guess maybe the security instrument is not enforceable? And I'm guessing this abandoned property is severly distressed?

Bill Gulley · Answer

There's no way to tell from the information given. Looks to me like some real estate guy decided to put notes up for sale and doesn't have a clue. Who cares if it was built in 1948, what's the market value. Was this a cash funded note or an equity seller financed note? As old as it is, who has been attempting collections, or did the holder abandon the note? I'd say a dude simply because the one advertising that slick little presentation doesn't have a clue what they are doing. Go to another web site to look for notes There are many who think there is no better way to separate a fool from his money than to sell old notes. :)

Wayne Brooks · Answer

Bill Gulley You've always got great info, but in Fl that is not true. If at a foreclosure, the plaintiff gets the property back (which would be for less than than the total debt judgment) the owner is completely out. If the lender gets it back, takes title from the auction,for say a high bid of $50k, and there's a total debt of $60k, then the lender sells the property on the market netting say $80k, (an unlikely scenario) nothing goes to the borrower. The borrower only gets any excess if the property sells at the foreclosure auction for more than the debt, and there are no other junior/senior debts that claim the surplus.

Bill Gulley · Answer

Might be by statute, but are you saying Fl has no court of equity and the previous owner is barred from suing in civil courts? You may not have heard of it, but windfall profits aren't going to fly in any court of equity in any state in the union. Most borrowers may walk away, lenders may not be required to give notice of sales, but that doesn't mean a borrower can't sue and win. Lender's interest are set in the UCC, regardless of practice or custom, push comes to shove no lender is going to be keeping a half million more than they were owed plus costs, just never heard of such a thing happening. Are there no homestead rights in FL? Now, that is with cash funded loans, since the topic is the DOS, I assumed cash loans, equity funded notes from installment sales are different as default terminates the sale agreement, that's a horse of a different color, the sale terminates and there is no equity and the property reverts back to that prior owner as you described if it's not sold at auction. This was drilled into my head in Washington at FDIC, as a national requirement, no insured lender is going to pull such dealings as it opens them to litigation that can create a loss. If your bank is doing that, it would be interesting in knowing where such windfall profits are booked on the bank's statements. Has to be accounted for. :)

Account Closed · Answer

@William Byers, Please carry on and get legal advice from a lawyer. I'll consider the thread still open until a moderator close it... William if you do buy a note and the borrower fail to pay you can go through the foreclosure process and get the property and that is the reason we have foreclosure laws for homeowners that don't pay the lender can reclaim the property. Joe Gore

Bill Gulley · Answer

William, I'll consider the thread closed, but it sounds like you're under the impression that if you buy a note and foreclose you get the property to go in a rehab and sell, which is not the case. You are never an owner unless the borrower deeds the property to you, wearing a note holder's hat is the same as a lender's hat, you get your money back and it ends there. Buying at a discount means you get the amount owing under the note, that's where your profit is. The borrower can come back for the rest. Now, if the court says the property was abandoned then that can be different. Check your state law. :)

William Byers · Answer

The second was definitely satisfied. I was confused when I found that on public records, and it was with Countrywide/WF. The write off/release makes the most sense. I confirmed the satisfaction by ordering the a title search. Only liens are $1350 for outstanding doc stamps, taxes are current. I also agree that the exit strategy needed to be foreclosure. To bring this thread to closure, I went by the property to determine condition. It was rehabbed, but the roof didn't get replaced and there is definitely water damage. When I ran numbers, it only worked for me to buy the note at $10k. I called seller and told him, and he said he had someone else lined up @$18k. I thanked him for his time. Thanks again to all, I appreciate the great information.

Account Closed · Answer

@William Byers, Do a title search and if there is no other liens and good deed, you cannot go wrong with paying $16K? Joe Gore