How do you buy the note for the second or short the second on an upside down property?

Question

We have a house that we owe $235K on the first and another $85K on the second. The house is on a penninsula that is reclaimed phosphate mine in the middle of a lake. Most of the home owners on the penninsula have filed sink hole claims. Our house has not yet shown any major signs of sink hole damage but the house next door has and based on what is happening it is probably just a matter of time before we see the same with ours. If it were not for the sink hole issues the house would be currently worth about $225K but with the sink hole issues much less. The rent on the house is just about enough to cover the first mortgage payment but not the second. We can not afford to continue to pay the difference but would rather not walk away from the house. If we do ever have to file a sink hole claim the insurance will not cover both first and second but it would cover the first. How can I go about getting the second to take much less than what is owed to settle out the account without selling the property? If it goes to foreclosure they will get nothing. I am trying to be proactive to try and keep the house which would require us getting rid of the second mortgage whether we end up with an insurance claim or not. The other thing is the insurance industry is lobbying hard to get the Florida legislature to make it more difficult for home owners to get paid on sink hole claims. IF that happens and the insurance companies can get away without paying on these houses if we end up having a problem we will definately end up in foreclosure.  The second is not a home equity loan it was a 80% / 20% loan that we got to purchase the house in 2006 at the height of the market. We have ideal renters who love the home and we have promised them that we would do everything we can to keep the house so they would not have to move. Does anyone have any ideas?

Scott Hubbard · Answer

In my experience, settling notes are very difficult but possible.  If I am not mistaken, Florida is deficiency state, so you will be on the hook for the loss.  This complicates matter a bit.  Here are some basic ideas.

1.  If the lender is a large multinational lender like Bank of America, Chase, Citi, WF, PNC, etc., your going to find it is very difficult to approach them since they only sell these notes in large pools as opposed to individually. Local or state banks will often times settle and cut their losses.  I have seen credit unions settle for zero just to get it off their books.

2. Second, it can be difficult for a borrower to settle their own mortgage without coming out of pocket.  You must make it worthwhile because in a deficiency state such as florida, a defaulted note is worth more than in a anti-deficiency state.  This is becuase they can sell bad debt to an independant collector (actually many of the big banks are starting their own collections companies) for 10 to 20 cents on the dollar.  So, you may have to cough up 20K just to be in the ball park.

3.  Are you in default on the payment?  It is much more difficult to settle while the account is current.  This, of course, is not written in stone.  If your planning to default, then your credit will take a major hit.  If you settle the loan, it can also take a major hit.

4.  Talk to a mortgage banker.  Do not pay up front, but inquire to see if they have atrack record in settling mortgages.  I find that when you hire a third-party to facillitate an action, it is many times to your benefit.

5.  Consider having a third-party purchase the note instead.  I have purchase notes and then had the borrower agree to settle with me  for more than I paid.  Some lenders are getting smart and putting in arm's length disclosures so this strategy will work better for smaller lender than too big to fail ones.

Are the renters able to purchase the house from you with a siugnificant down payment.  Since the 1st mortgage can be supported by the rent, perhaps you can use their DP to settle the mortgage?

In my opinion, your going to need a strategy and it sounds like your on the right path.  Perhaps respond with the name of the 2nd mortgage and we can try and make a few more suggestions.

Good Luck!

Dan Burrows · Answer

Steve,
When I said that B of A would have to get in line I am talking about after they take it to foreclosure and get nothing because the first will take everything that comes in at sale. Then they would have to pursue a deficiency judgement because the asset would be gone.
At that point they would have to get in line with other creditors who have judgements because the collateral would be gone. So they would spend a bunch of money pursuing foreclosure which would leave them needing to spend more money to get a deficiency judgement to try and bleed a turnip. It would make waaaaay more sense to sell the note than pursue foreclosure!

Steve Babiak · Answer

Of course, BoA could still make out at foreclosure IF they get somebody to bid on that second at auction - and we've had a few posts on the forums this year where people have bid on junior positions at auction.  That's a big IF; my earlier post was under the assumption that BoA wouldn't get that lucky at auction.

Mike G. · Answer

Ah, I see what you're saying.  I was just assuming they get whatever money they could and then let it foreclose again, but there are probably issues with that from a bank's perspective that I'm unaware of.

Steve Babiak · Answer

BoA is in second position, and the house is worth less than the balance owed on the first.  If BoA forecloses from second position, BoA must pay off the first in order to have clear title.

Mike G. · Answer

Steve, why does it not make financial sense for BofA to foreclose?  If the homeowner is not making payments on the loan, and BofA forecloses, they MAY get something back at foreclosure.  If they don't foreclose, then they're not going to get anything, right?  Assuming they don't sell the note as an alternative, I mean.

Steve Babiak · Answer

Ah, you are mistaken here.  Bank of America has a secured second position - they are only behind the first mortgage.  Those other judgments are then behind BoA's position.

It is true that BoA will probably still net nothing, but only because the first is owed more than what the house's value is.  BoA will eventually file to foreclose now that you are behind on that second mortgage.  And they will proceed to foreclosure even though it doesn't seem to make economic sense!

Michael Lauther · Answer

I reviewed this post briefly and have some thoughts. It appears that your credit is trashed but that you want to avoid bankruptcy. I f you do not have substantial assets  and your income qualifies you may be able to negotiate a modification on your first mortgage. not the "Obama plan" because this is a rental property, but an in house modification from your lender.  This could substantially lower your payments. you can now deal with your second mortgage and re-negotiate terms. since they know that if you did go bankrupt they could be stripped as a lean holder and get nothing. The sink hole problem works to your advantage because your lenders may find that there is no market for the property and a BPO will probably reflect a very low value. If you PM me I will be happy to give you the benefit of my experience in this area. I am not an attorney, real  estate broker, or mortgage broker but have been involved in many of these kinds of transactions.

Dan Burrows · Answer

My thought is that it is in Bank of America's best interest if they sell the note because if they take it to foreclosure or short sale to get a deficiency judgement they will have to get in line behind those who already have judgements and we don't have any assets to take to cover those. If I had a lot of assets and good credit I could see where that might make sense for them but given the circumstances cutting their losses and selling the note is the most logical and business savy thing to do.

Dan Burrows · Answer

The 2nd is with Bank of America. I think it was originally a Countrywide loan.
The renters are not in a position to buy the house.
The rent does not quite cover the 1st mortgage. We will still have to come up with over $100 per month to cover the negative cash flow after getting rid of the 2nd. But we will manage that. We just can't handle the $600+ we are putting out now.
I would be happy to pay a third party to negotiate the deal. 
One of the reasons I was looking to buy the note on the second was so I would not have a deficiancy to worry about. That is one reason I would rather buy it than short it.
We are about 60 days late at this point on the second. First is current.
We have other judgments against us on credit cards already right now so our credit went from high 700's to the cellar over the last 2 years.
I have some investors who are willing to buy the note and do a major "loan modification" on it for me. 
I also think I could sell the property "subject to" the first if we can negotiate a decent price on the note for the 2nd.

How do you buy the note for the second or short the second on an upside down property?

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