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

[Wayne Brooks]

No, redemption rights allow you to redeem, at the full value of the judgment.  And, the bank already "owns the debt" and it's the property, not the debt, being sold at the auction.

[Marc M.]

Thanks for replying @Wayne Brooks, but I'm still confused... it was my understanding that each week the foreclosure attorney's working with the banks decide how much to set the value of the judgement the borrow has defaulted on. So, if the original loan amount is above and beyond the value of the home no investor will buy it, and it goes back in the pile until next week's auction. At the next auction the debt amount might be reduced by $10K or so, which the bank writes off as loss or is somehow recaptured through Fannie and Freddie mortgage insurance, so I'm told. If the investors in the audience bid a property well beyond the debt owed, that money is supposed to go back to the homeowner, right? I agree with you that the banks are auctioning off the property as well....but until the 6 month redemption period has passed all you really own is a note as far as I can tell. If the homeowner buys the property back from you within the redemption period, they owe the debt amount + interest of the original note. Correct?

[Wayne Brooks]

First we don't have redemptions here, so I don't deal with them.  But no, when you buy a property at an auction where redemption rights apply, you are still buying the property, only there is the right for that sale to be rescinded.  Also, the bank's rep isn't changing the value of the judgment, they are simply adjusting the price , and therefore the amount of loss they are willing to take, that they will let it go for at the auction.  My understanding is that bidders who buy at these auctions will seek out the previous owners and offer them a small amount for their redemption rights, so they can move forward with their plans.

[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.

[Christopher Winkler]

Originally posted by @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).

* 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.

Hi Ron, wanted to make a correction here. Banks do not always bid on their debt. We picked up a note in Columbus and its been sitting for a couple years because the bank did not either make any bid, or bid the minimum. They sold it to the fund we bought it from to finally liquidate. We stepped in as substitute for counsel, and 1 month later had a sale date. We bid the minimum, though since we owned the note, we just paid court costs.

But it is not an REO if it does not sell at foreclosure auction. They don't take title, so if you don't have title, you don't own it; the homeowner still has the deed in their name & you still have to get a winning bid at FC sale. You only have the mortgage/note.

Also, some counties make you start at a certain percentage of a price they select. This one, bids had to start @ 2/3 of the Sheriffs appraiser price, which was higher than FMV. Other counties might be different.

[Ron S.]

First...Are you talking about columbus Michigan? Or Columbus Ohio? I'll assume Ohio for now. If a valid assumption, this is Michigan. Judicial versus non judicial and comletely different rules and procedures.

Second...shouldn't be a correction...the original post related to bidding at foreclosure. IF there is a foreclosure sale, they will always bid. Why go to sale if there is no bid? You can't go to sale without a bid so, yes, they always bid on their debt if they go to sale. In your scenario, they didn't go to sale so, it makes sense there was no bid but if they did go to sale, there would be a bid. So, since they didn't go to sale, they sold you the note. How is that any different than what I said earlier?

Note sales and foreclosure sales are apples and oranges here and appear to be incorrectly comingled together as one in the same.

It will always be an REO if it doesn't sell 3rd party at the foreclosure sale. Yes, they do take title. A Trustee's Deed upon Sale is issued to the bank if there are no successful 3rd party bidders. The bank might have to wait for up to 12 months to get it but, they will get title after the redemption period. Will they and can they do something with the note after the sale where they won't take title? Sure! That's a different issue though and not related to a foreclosure sale that reverts back to the benificiary.

I have no argument with you about setting a minimum bid to start but remember, if you are talking Ohio and we are talking Michigan, it's different. There is no 2/3's of appraised value requirement in Michigan. Sure, that happens all the time, all over the place. The bank determines what bid they will allow before they counter back with a competing credit bid though, if that's in question regardless of what the starting bid may (or may not) be required to be.

[Marc M.]

@Ron S., I think you can advise on this particular case: The property I am interested in has an outstanding mortgage of $176K and went into foreclosure. The owner had tried to sell it for $270K and then dropped the price to $245K. Yesterday the bank put it up for auction at the weekly foreclosure sale at the courthouse for $76K and no one bid on it....so I assume they ended up with the property as an REO from their credit bid, right? And now the 6-month redemption period begins.

So what are my options as the investor? From your previous comment, you warn against trying to get the owner to quitclaim the deed because I'd be on the hook for the original $176k? Or can I get the deed and then pay off the bank the $76K from their credit bid? 

Thanks,

marc

[Christopher Winkler]

Originally posted by @Ron S.:

First...Are you talking about columbus Michigan? Or Columbus Ohio? I'll assume Ohio for now. If a valid assumption, this is Michigan. Judicial versus non judicial and comletely different rules and procedures.

Second...shouldn't be a correction...the original post related to bidding at foreclosure. IF there is a foreclosure sale, they will always bid. Why go to sale if there is no bid? You can't go to sale without a bid so, yes, they always bid on their debt if they go to sale. In your scenario, they didn't go to sale so, it makes sense there was no bid but if they did go to sale, there would be a bid. So, since they didn't go to sale, they sold you the note. How is that any different than what I said earlier?

Note sales and foreclosure sales are apples and oranges here and appear to be incorrectly comingled together as one in the same.

It will always be an REO if it doesn't sell 3rd party at the foreclosure sale. Yes, they do take title. A Trustee's Deed upon Sale is issued to the bank if there are no successful 3rd party bidders. The bank might have to wait for up to 12 months to get it but, they will get title after the redemption period. Will they and can they do something with the note after the sale where they won't take title? Sure! That's a different issue though and not related to a foreclosure sale that reverts back to the benificiary.

I have no argument with you about setting a minimum bid to start but remember, if you are talking Ohio and we are talking Michigan, it's different. There is no 2/3's of appraised value requirement in Michigan. Sure, that happens all the time, all over the place. The bank determines what bid they will allow before they counter back with a competing credit bid though, if that's in question regardless of what the starting bid may (or may not) be required to be.

Columbus, OH, my apology for not clarifying. I don't want to split hairs, though what your saying is not correct, and I am just pointing out they do not ALWAYS bid. My situation clearly rebuts your broad brush, absolute statements, don't take offense for clarifying your always or every time comments. There are hundreds of counties in the country and if you are not familiar with them all, you might want to rephrase things as most or the majority of the time x happens. The property we just foreclosed on went to foreclosure sale and did not sell, so in our situation, what you say is not correct.

So that means even PNC did not bother to make a bid, or their bid was not at the 2/3 of what the Sheriff appraised it for. So its been sitting on their books for a couple years. The seller is liquidating all these for them, so  I am rebutting your comments with facts. It did go to sale, and no one bought it. 

So either PNC did not bid high enough, or no one at all bid; either way, we have title and we now own the property. If they would have bid the minimum, they would have title and it would be an REO and it was not. All they would have had to pay was the court costs, even if they would have made a bid., that's all we did. They would not have had to come up with the full amount of the bid as owner of mortgage. Since it did go to sale and did not sell, we are allowed to go back and try again, thus the 30 days to arrange sale, not starting from day one.

You can schedule a foreclosure, sure. I think PNC was hoping someone would bid and no one did. So title did not change hands. I have no idea why they did not bid.I stand uncorrected!

And yes, note & FC sales are not the same, though the only way to get title when you buy the note/mortgage is to go to sale, so not sure why YOU are mingling them together, I am not. I could not be more clear we bought the note/mortgage. We noticed it went to sale and did not sell at FC sale, so our attorney filed for another sale, yes, 2 completely different transactions. 

And no, its NOT ALWAYS an REO to the bank if they don't have title. In our case we still had to foreclose to get title. Banks have to foreclose to get title for it to be owned by them, as technically they do not own it until they get the deed. They loaned the money and the homeowner signed a mortgage and note, but the deed is held by the homeowner in this situation. Land Contracts or Contract for Deed are different where homeowner does not hold title. 

Also, it was a Survivorship Deed, not a Trust for Deed or Trust Deed. There is no trustee and regarding our case, it did not revert back to PNC. It was never going to revert back. Its you that is mixing apples with oranges. Also, when whoever does get title/deed, the note is worthless, except to go after them personally as its no longer secured by the property. It's now an unsecured note and they are still liable. In this case, the homeowner is not on this earth, so to us the note is worthless and we are selling it for FMV.

The 2/3 minimum is how it works in Franklin County, OH, each county has different procedures. And yes, in most or the majority of situations, the seller (bank or investor) does set a minimum bid. 

However, in our case the bank does NOT set any bid, the County does, and its up to the bank or current owner of the mortgage to hit the minimum bid in Franklin county. All I am doing is correcting your absolute statements that are not correct, at least in our recent foreclosure. 

[Ron S.]

@Winkler - You just regurgitated the same crap from your first post, only you added a whole bunch more words to make your case in the second post. Ok...you win! Your right!! I guess i've been doing foreclosures in the state of Michigan for the last 20 years incorrectly, and so have all of the lenders, title companies, trustee, auctioneers and attorneys I work with! Thank you for setting me on the correct path.

[Ron S.]

@ Marc - According to Michigan statute: Redemption rights, which would allow a party whose property has been foreclosed to reclaim that property by making payment in full of the sum of the unpaid loan plus costs. The redemption period varies but a deed issued as part of a foreclosure only effectuates a transfer after the expiration of the redemption period (Take that Winkler!)

In my opinion, I would request a redemption quote from the foreclosed borrower (They call the lender and find out what they have to pay), so that you know exactly what that amount is.

If you want to read the actual statute:

(1) A purchaser's deed under section 3232 is void if the mortgagor, the mortgagor's heirs or personal representative, or any person that has a recorded interest in the property lawfully claiming under the mortgagor or the mortgagor's heirs or personal representative redeems the entire premises sold by paying the amount required under subsection (2) and any amount required under subsection (4), within the applicable time limit prescribed in subsections (7) to (12), to the purchaser or the purchaser's personal representative or assigns, or to the register of deeds in whose office the deed is deposited for the benefit of the purchaser.

(2) The amount required to be paid under subsection (1) is the amount that was bid for the entire premises sold, interest from the date of the sale at the interest rate provided for by the mortgage, the amount of the sheriff's fee paid by the purchaser under section 2558(2)(q), and an additional $5.00 as a fee for the care and custody of the redemption money if the payment is made to the register of deeds. Except as provided in subsection (14), the register of deeds shall not determine the amount necessary for redemption. The purchaser shall provide an affidavit with the deed to be recorded under this section that states the exact amount required to redeem the property under this subsection, including any daily per diem amounts, and the date by which the property must be redeemed shall be stated on the certificate of sale. The purchaser may include in the affidavit the name of a designee responsible on behalf of the purchaser to assist the person redeeming the property in computing the exact amount required to redeem the property. The designee may charge a fee as stated in the affidavit and may be authorized by the purchaser to receive redemption money. The purchaser shall accept the amount computed by the designee