Would an investor help?...this is a tough one..
Realtor · Phoenix · Member since 2018 · 6 posts · 1 vote
Hello Bigger Pockets!
I'm a Realtor in Phoenix, AZ and I was wondering if there is a such thing as investors out there who reconstruct loans for families? I have someone in a situation where they can no longer afford their monthly mortgage payment due to property taxes increasing and other circumstances. She is current but is afraid she will fall behind soon. I've heard of investors buying non-performing loans and reconstructing them so that the monthly payments are more affordable allowing them to refinance later etc but I'm not sure how feasible that is these days.
What I know is that the home is worth approximately $275K and she owes about $226K. She cannot refinance now due to poor credit and shes only owned the home for about 2 years. She wants to remain in the home because she isn't sure that she can rent it out for her mortgage payment $1700.
Any suggestions besides selling the home or renting it out?
@Brooke Carlton, I think what you're referring to is "note investing."
I'm no expert on the subject, so take this with a grain of salt, but I don't think your friend's situation is an applicable one.
First, the notes that investors buy are already non-performing and are being sold by the lender. Typically, they're not 1st position loans (instead, think Home Equity loans or similar). The lender doesn't want to foreclose, because the loan in 1st position (primary mortgage) would have to be paid off before the 2nd position sees anything. Instead the lender sells the loan, often at a deep discount ($30k for a loan with $100k balance for example) and writes off the rest.
This is where a note investor comes in, they buy the loan for $30k, then go to the homeowner and restructure. The investor can offer to cut down the amount owed to $60k. They double their money (more than double because they're getting interest) and the homeowner has reduced their debt by 40%.
What does this all mean for your friend? Not great news, I'm afraid. She's got a dose of reality coming. Other than sell (this doesn't sound like a good rental at all), the only alternative I can think of is to rent out a room or 2. I bet she could get $600/month to rent out a bedroom. Hopefully, that's enough to get her through the rough patch.
No matter what she decides, please encourage her to make a decision and take action now. If she falls behind and foreclosure starts, it will be almost impossible to recover and the consequences can be devastating.
@Brooke Carlton, I think what you're referring to is "note investing."
I'm no expert on the subject, so take this with a grain of salt, but I don't think your friend's situation is an applicable one.
First, the notes that investors buy are already non-performing and are being sold by the lender. Typically, they're not 1st position loans (instead, think Home Equity loans or similar). The lender doesn't want to foreclose, because the loan in 1st position (primary mortgage) would have to be paid off before the 2nd position sees anything. Instead the lender sells the loan, often at a deep discount ($30k for a loan with $100k balance for example) and writes off the rest.
This is where a note investor comes in, they buy the loan for $30k, then go to the homeowner and restructure. The investor can offer to cut down the amount owed to $60k. They double their money (more than double because they're getting interest) and the homeowner has reduced their debt by 40%.
What does this all mean for your friend? Not great news, I'm afraid. She's got a dose of reality coming. Other than sell (this doesn't sound like a good rental at all), the only alternative I can think of is to rent out a room or 2. I bet she could get $600/month to rent out a bedroom. Hopefully, that's enough to get her through the rough patch.
No matter what she decides, please encourage her to make a decision and take action now. If she falls behind and foreclosure starts, it will be almost impossible to recover and the consequences can be devastating.
Yes note investing is the term I was looking for. Thanks for the info!
Hi @Brooke Carlton. The problem your friend faces is that a lot of traditional lenders won't work with borrowers towards a loan modification unless they are already not paying and then it's not guaranteed that they will anyway. If it's with a smaller bank maybe there's some bit of hope to call them up and see what she can do, but it's still a long shot. She's unlikely to be able to talk the bank into selling her loan to another party just to help her out.
Just as an aside @Jaysen Medhurst that was a pretty good summary, but there's not really anything that would preclude it being a 1st position lien. They're sold on the secondary market and are probably much more prevalent than 2nd position liens for purchase. They also don't need to be non-performing. Performing loans are sold all the time just at a smaller discount. Also, most 2nd position lenders would foreclose if they are non-performing whether the borrower is paying on the 1st or not. They have no obligation to pay the 1st off.
It's hard to sell people on a second position loan when the first is in danger of going into default. I'm not convinced that getting an investor for a second position is the way to go here.
Banks like to avoid foreclosure when possible, as it is a huge amount of time and expense for them. (The legal fees alone are significant.) Many banks would rather work with the borrower BEFORE the loan goes into default. That's not a guarantee they will, but it leads me to believe that your client should explore other options. Google her particular lender and see what programs they offer for people struggling with mortgage payments.
HUD also offers a whole list of programs (https://www.hud.gov/topics/avoiding_foreclosure). When I was practicing bankruptcy law, a lot of debtors used the HAMP program to stay in their homes as they modified other debt. It's definitely worth looking into these programs.
Hope this helps!