Can Banks Buy Their Bad Debt At A Discount?

[Marc M.]

Hello BPers,

I am somewhat new to foreclosure investing...I've bought at county-tax foreclosure auctions, but haven't purchased anything from a bank yet.

I've started attending weekly mortgage foreclosure auctions at the courthouse in Detroit where banks auction off their bad mortgages to investors....usually for a $1 over the starting bid amount (the bad mortgage debt). Recently, a house I had been following week-to-week after it continued to be adjourned came up for auction for about half of what the advertised debt was in the 'foreclosure information' provided by auction.com., and from what I could tell the bank bid on their own debt. To my question...if banks can buy their own non-performing loans at a huge discount, does the typical 6-month redemption period still apply? In other words, could I try to buy the deed from the homeowner for a few thousand dollars, and then go to the bank and pay off the now discounted debt amount to obtain the house free-and-clear? 

I have seen other investors do this to each other....where someone buys the bad debt at the auction, and then someone else swoops in a few days later and gets the homeowner to quitclaim the deed to them for small sum of money (given that they cannot afford to buy back the property and are willing to take what they can get since their losing the house anyway.)...kind of like cash-for-keys, or said differently cash-for-deed. Then the 'shark-investor' either charges a fee to original debt-purchaser for the deed or pays off the original investor's purchase amount of the bad mortgage. 

Best,

Marc

[Ron S.]

* Banks ALWAYS bid on their own debt at sale. It's called a "Credit Bid". They don't actually write a check. As the foreclosing entity, their openning bid is their credit bid and they can bid up to total debt. Buyers can bid beyond total debt if they think there is a deal there. (See what happens if that is the case below).

* You can "Buy the deed" for a few thousand from the homeowner then have the bank laugh at you when you request a discounted payoff from them. There is no "Discounted amount". The redemption rights that belong to the HOMEOWNER require the total debt plus fees and costs to be paid to redeem the home.

* Banks don't buy their non performing loans. They already own them. They sell them (The loan/note)! Or they foreclose on the property securing the non performing loan.

* Foreclosure attorneys have nothing to do with setting the bid or value amount. The bank does. The foreclosure attorney simply processess the lender's instructions.

* Banks don't "Set the value of the judgment". Banks are required to publish the factual judgment amount (= How much the borrower owes including fees/costs). It is what it is. It's not a "Value", it's the actual default amount they owe. Now, what they open the bid at, may have nothing to do with the judgment amount. It's usually a factor of value (Usually, but its investor specific). (Bid instructions to attorney might look like, "you are instructed to open the bid at 95% of Fair Market Value).

*Banks don't go to Sheriff sale auction hoping for a specific amount, then go to sale again if they don't get that amount or change the amount. The bank (The attorney for the bank, or the vendor for the attorney, for the bank) sets the amount, it gets published with a sale date. That sale date happens and it's done, once. not repeatedly until some magic number or outcome happens. If a 3rd party (Not the bank) doesn't buy it, it goes back to the bank as REO. The redemption period starts after the Sheriff sale. If the borrower abandons the home, vacates the home, does not allow the bank (Or 3rd party purchase) the right to inspections, the Sheriff can evict and eliminate the redemption period (Which can be up to 12 months depending on principle paydown and/or other factors) or, reduce the redemption to 30 days from Sheriff sale. Don't mistake a postponment for your scenario. Just because the bank postpones a sale doesn't mean they are doing anything other than a postponment (Like trying to entice different bids, interest in it, etc..). It costs the bank to postpone, each time.

* Somehow recaptured through Fannie/Freddie Mortgage Insurance? You were told wrong. There is no such thing. You are mixing little bits and pieces of a very big puzzle together that do not go together. ..

* Banks already wrote down their losses prior to sale. Probably a couple of times. They may take a subsequent writedown after sale depending in the net deficiency and, might even take another one after they sell it on the open market, depending on the net deficiency (If there is one).

* To the one thing you heard right, correct, if there is a 3rd party bid above and beyond total debt owed, any overage after the debt owed, fees and costs and any other liens behind the foreclosing entity is paid, it goes back to the original homeowner/borrower.

* No one bought the note at the foreclosure sale. The sale is for the home, not the note.