How does foreclosure work in second position?
Rental Property Investor · Fort Collins, CO · Member since 2015 · 158 posts · 327 votes
How does foreclosure work in second position?
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Rental Property Investor · Mason, OH · Member since 2015 · 97 posts · 136 votes
4y@James Free With anything in the foreclosure space, everything is state specific. I can tell you how they handle it in Ohio (note: I am not an attorney but I watch a lot of law and order). As a lien holder, you will be served a notice of the foreclosure which you have to answer to get a place in line. So you answer, and you tell them how much is owed, you should receive a place in line when they distribute the proceeds. In most cases, the order of the payout is: 1) court costs 2) real estate taxes due or any real estate tax liens sold 3) 1st lien position (usually first mortgage), 4) anyone else who answered the foreclosure filing who has a superior lien position 5) any additional funds go back to the clerk or courts for further instructions to which the homeowner can get the excess funds. You'd be surprised how many times there are excess funds especially with estates.
I was the president of a Condo Association where there was an investor who owed money to the COA and lost 10-12 properties though foreclosures. We answered every filing and finally we got lucky and got paid on one of them.
Also, I am following a foreclosure in Ohio where the 2nd mortgage holder is filing foreclosure and the first mortgage answered (keep in mind if the 1st mortgage holder doesn't answer then you move up in the distribution list). Instead of the 1st taking the proceeds from the foreclosure they have to option for the foreclosure to proceed subject to their mortgage. So the property sells and the mortgage stays in place. I'm looking to bid on it, because I'd love to get a nice rental property with 30 yr fixed rate mortgage already on it.
18 Replies
- Rental Property Investor · Mason, OH · Member since 2015 · 97 posts · 136 votes4y
@James Free With anything in the foreclosure space, everything is state specific. I can tell you how they handle it in Ohio (note: I am not an attorney but I watch a lot of law and order). As a lien holder, you will be served a notice of the foreclosure which you have to answer to get a place in line. So you answer, and you tell them how much is owed, you should receive a place in line when they distribute the proceeds. In most cases, the order of the payout is: 1) court costs 2) real estate taxes due or any real estate tax liens sold 3) 1st lien position (usually first mortgage), 4) anyone else who answered the foreclosure filing who has a superior lien position 5) any additional funds go back to the clerk or courts for further instructions to which the homeowner can get the excess funds. You'd be surprised how many times there are excess funds especially with estates.
I was the president of a Condo Association where there was an investor who owed money to the COA and lost 10-12 properties though foreclosures. We answered every filing and finally we got lucky and got paid on one of them.
Also, I am following a foreclosure in Ohio where the 2nd mortgage holder is filing foreclosure and the first mortgage answered (keep in mind if the 1st mortgage holder doesn't answer then you move up in the distribution list). Instead of the 1st taking the proceeds from the foreclosure they have to option for the foreclosure to proceed subject to their mortgage. So the property sells and the mortgage stays in place. I'm looking to bid on it, because I'd love to get a nice rental property with 30 yr fixed rate mortgage already on it.
- Specialist · Frederick, MD · Member since 2017 · 475 posts · 454 votes4y
Keep in mind most experienced junior lien investors will advance funds to any senior lien holders in order to bring the accounts current, and this is within their rights to do so. Controlling a large asset with a small investment via a junior lien creates a great deal of leverage.
- Rental Property Investor · Mason, OH · Member since 2015 · 97 posts · 136 votes4y
Quote from @Marco Bario:
Keep in mind most experienced junior lien investors will advance funds to any senior lien holders in order to bring the accounts current, and this is within their rights to do so. Controlling a large asset with a small investment via a junior lien creates a great deal of leverage.
What are some reasons the junior lien holder would advance funds to the senior? I'm assuming you're saying that a 2nd mortgage holder would pay the first mortgage holder. I'm having a hard time imagining the circumstances. I feel like its good money being thrown after bad money.
I've seen 1st mortgage holders pay condo liens which are junior in Ohio as well as real estate taxes which are senior to the mortgage.
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes4y
@James Free In your example, the first mtg stays in place after your foreclosure, since it is superior....therefore bidders wouldn’t bid nearly that much...any bid amount over your judgment value would go to the owner, assuming there are no liens junior to yours.
- Specialist · Frederick, MD · Member since 2017 · 475 posts · 454 votes4y
Quote from @Adam Walter:
Quote from @Marco Bario:
Keep in mind most experienced junior lien investors will advance funds to any senior lien holders in order to bring the accounts current, and this is within their rights to do so. Controlling a large asset with a small investment via a junior lien creates a great deal of leverage.
What are some reasons the junior lien holder would advance funds to the senior? I'm assuming you're saying that a 2nd mortgage holder would pay the first mortgage holder. I'm having a hard time imagining the circumstances. I feel like its good money being thrown after bad money.
I've seen 1st mortgage holders pay condo liens which are junior in Ohio as well as real estate taxes which are senior to the mortgage.
To fend off foreclosure and to continue to control the underlying asset from a junior position. I would never bother paying a lien that's junior to mine, but I would, and I have advanced loans and taxes senior in position to my lien. In some states, HOA's receive super-lien treatment and move into 1st position ahead of debt liens.
Quote from @Adam Walter:
@James Free With anything in the foreclosure space, everything is state specific. I can tell you how they handle it in Ohio (note: I am not an attorney but I watch a lot of law and order). As a lien holder, you will be served a notice of the foreclosure which you have to answer to get a place in line. So you answer, and you tell them how much is owed, you should receive a place in line when they distribute the proceeds. In most cases, the order of the payout is: 1) court costs 2) real estate taxes due or any real estate tax liens sold 3) 1st lien position (usually first mortgage), 4) anyone else who answered the foreclosure filing who has a superior lien position 5) any additional funds go back to the clerk or courts for further instructions to which the homeowner can get the excess funds. You'd be surprised how many times there are excess funds especially with estates.
I was the president of a Condo Association where there was an investor who owed money to the COA and lost 10-12 properties though foreclosures. We answered every filing and finally we got lucky and got paid on one of them.
Also, I am following a foreclosure in Ohio where the 2nd mortgage holder is filing foreclosure and the first mortgage answered (keep in mind if the 1st mortgage holder doesn't answer then you move up in the distribution list). Instead of the 1st taking the proceeds from the foreclosure they have to option for the foreclosure to proceed subject to their mortgage. So the property sells and the mortgage stays in place. I'm looking to bid on it, because I'd love to get a nice rental property with 30 yr fixed rate mortgage already on it.
How are you going to service said 30 year mortgage that would be left in place? The note holder of the first might tell you they will not give you any information because you’re not Authorized. I ran into that very issue a number of years back. I won the house, but the first lien position refused to give me the amount to pay them monthly or bring it current. They were real jerks about it. I finally had to walk and lost the money I had invested because the property did not make sense if I had to pay the first off. The people that were foreclosed on were so ticked about loosing the house that they would not give me authorization to talk to the lender that held the first. The first ended up having to foreclose since the former owner was not paying I couldn’t get the info to service loan.
Quote from @Marco Bario:
Keep in mind most experienced junior lien investors will advance funds to any senior lien holders in order to bring the accounts current, and this is within their rights to do so. Controlling a large asset with a small investment via a junior lien creates a great deal of leverage.
How are you able to get the info to service the senior Note holder. I was the foreclosing Junior lienholder before and the senior lienholder would not give me the information to bring their loan current or to make the underlining payments after I foreclosed. The underlying lienholder said that I was not authorized for them to give me information and they refused. I finally had to walk and cut my losses because the property would not have been worth it had I had to get a new loan.
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes4y
@Joe S. As a holder of title in succession (like when you get title through a foreclosure) the mortgage holder is required by federal law to give you a pay off amount (not that it make take some repeated effort)....but they are Not required to let you bring the loan current and/or just continue to let you make payments.
Quote from @Wayne Brooks:
@Joe S. As a holder of title in succession (like when you get title through a foreclosure) the mortgage holder is required by federal law to give you a pay off amount (not that it make take some repeated effort)....but they are Not required to let you bring the loan current and/or just continue to let you make payments.
Well Senior lien holders sure didn’t let me bring the note current or let me just continue to make payments. If you noticed some of the above posters are making it sound like the first lien holder will allow you to simply make payments on their note. That’s what I was trying to point out. In Guru land the instructor made it sound like the first lienholder was obligated to let Junior lien holders make payments. This was not my experience, but I sure thought it was going to be. Now you have posters still telling the world that we can make payments on senior liens From a junior position.
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes4y
@Joe S. Yeh, I hear you on the guru crap. The only lenders I know of that have allowed it are HML's. Neither HML's or traditional lenders want to foreclose, but traditional lenders, who lend to happy homeowners, are under so many regulations, have mortgage insurance regulations, etc., that they likely can't Legally allow someone to step in and takeover a loan in default.
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Adam Walter:
@James Free With anything in the foreclosure space, everything is state specific. I can tell you how they handle it in Ohio (note: I am not an attorney but I watch a lot of law and order). As a lien holder, you will be served a notice of the foreclosure which you have to answer to get a place in line. So you answer, and you tell them how much is owed, you should receive a place in line when they distribute the proceeds. In most cases, the order of the payout is: 1) court costs 2) real estate taxes due or any real estate tax liens sold 3) 1st lien position (usually first mortgage), 4) anyone else who answered the foreclosure filing who has a superior lien position 5) any additional funds go back to the clerk or courts for further instructions to which the homeowner can get the excess funds. You'd be surprised how many times there are excess funds especially with estates.
I was the president of a Condo Association where there was an investor who owed money to the COA and lost 10-12 properties though foreclosures. We answered every filing and finally we got lucky and got paid on one of them.
Also, I am following a foreclosure in Ohio where the 2nd mortgage holder is filing foreclosure and the first mortgage answered (keep in mind if the 1st mortgage holder doesn't answer then you move up in the distribution list). Instead of the 1st taking the proceeds from the foreclosure they have to option for the foreclosure to proceed subject to their mortgage. So the property sells and the mortgage stays in place. I'm looking to bid on it, because I'd love to get a nice rental property with 30 yr fixed rate mortgage already on it.
any times in that scenario the first will be in default very soon if not already check your alienation clauses in that state the first could just go right to foreclosure once you take title so you have to pay it off. - 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Joe S.:
Quote from @Adam Walter:
@James Free With anything in the foreclosure space, everything is state specific. I can tell you how they handle it in Ohio (note: I am not an attorney but I watch a lot of law and order). As a lien holder, you will be served a notice of the foreclosure which you have to answer to get a place in line. So you answer, and you tell them how much is owed, you should receive a place in line when they distribute the proceeds. In most cases, the order of the payout is: 1) court costs 2) real estate taxes due or any real estate tax liens sold 3) 1st lien position (usually first mortgage), 4) anyone else who answered the foreclosure filing who has a superior lien position 5) any additional funds go back to the clerk or courts for further instructions to which the homeowner can get the excess funds. You'd be surprised how many times there are excess funds especially with estates.
I was the president of a Condo Association where there was an investor who owed money to the COA and lost 10-12 properties though foreclosures. We answered every filing and finally we got lucky and got paid on one of them.
Also, I am following a foreclosure in Ohio where the 2nd mortgage holder is filing foreclosure and the first mortgage answered (keep in mind if the 1st mortgage holder doesn't answer then you move up in the distribution list). Instead of the 1st taking the proceeds from the foreclosure they have to option for the foreclosure to proceed subject to their mortgage. So the property sells and the mortgage stays in place. I'm looking to bid on it, because I'd love to get a nice rental property with 30 yr fixed rate mortgage already on it.
How are you going to service said 30 year mortgage that would be left in place? The note holder of the first might tell you they will not give you any information because you’re not Authorized. I ran into that very issue a number of years back. I won the house, but the first lien position refused to give me the amount to pay them monthly or bring it current. They were real jerks about it. I finally had to walk and lost the money I had invested because the property did not make sense if I had to pay the first off. The people that were foreclosed on were so ticked about loosing the house that they would not give me authorization to talk to the lender that held the first. The first ended up having to foreclose since the former owner was not paying I couldn’t get the info to service loan.
what Marco is talking about is he probably made a second position loan and by doing so he got UP front authorization to talk to the first before he even made the loan on the second thats standard procedure in those cases to keep from what happened to you from happening :) as Wayne mentioned though you have the right to pay it in full including all interest and expenses that maybe out to the senior position. what U dont have is the right to assume or like what Adam was saying Hey I want this because there is a nice fixed 30 year loan.. can it happen sure but it really depends on who holds the note.. Its not a given. - Specialist · Frederick, MD · Member since 2017 · 475 posts · 454 votes4y
Similar to Joe, I have foreclosed subject to an institutional 1st and continued payments to hold the loan current without mortgagor authorization.
How? Prior to foreclosure, I wrote a letter to the first lien servicer explaining I was a junior lienholder and wished to obtain information in order to bring their loan current. With the letter, I included documentation showing my LLC was the current junior lienholder... copies of the note, mortgage, endorsements, and recorded assignments.
Commonly used institutional notes and security agreements allow for a junior lienholder to protect their security interest. I quoted that language as well.
I didn't exactly receive an all-access pass, but in my case, I received enough to know what was needed to reinstate, and the monthly payment amount going forward.
I'm not sure it will work every time, but in the particular instance I'm citing, it did work for me.
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Marco Bario:
Similar to Joe, I have foreclosed subject to an institutional 1st and continued payments to hold the loan current without mortgagor authorization.
How? Prior to foreclosure, I wrote a letter to the first lien servicer explaining I was a junior lienholder and wished to obtain information in order to bring their loan current. With the letter, I included documentation showing my LLC was the current junior lienholder... copies of the note, mortgage, endorsements, and recorded assignments.
Commonly used institutional notes and security agreements allow for a junior lienholder to protect their security interest. I quoted that language as well.
I didn't exactly receive an all-access pass, but in my case, I received enough to know what was needed to reinstate, and the monthly payment amount going forward.
I'm not sure it will work every time, but in the particular instance I'm citing, it did work for me.
Unfortunalty a few times I had the exact opposite results No cooperation at all.. roll of the dice right ?
Quote from @Marco Bario:
Similar to Joe, I have foreclosed subject to an institutional 1st and continued payments to hold the loan current without mortgagor authorization.
How? Prior to foreclosure, I wrote a letter to the first lien servicer explaining I was a junior lienholder and wished to obtain information in order to bring their loan current. With the letter, I included documentation showing my LLC was the current junior lienholder... copies of the note, mortgage, endorsements, and recorded assignments.
Commonly used institutional notes and security agreements allow for a junior lienholder to protect their security interest. I quoted that language as well.
I didn't exactly receive an all-access pass, but in my case, I received enough to know what was needed to reinstate, and the monthly payment amount going forward.
I'm not sure it will work every time, but in the particular instance I'm citing, it did work for me.
Going forward I will always have an authorization signed upfront if I do a second. The word on the street was I could simply make payments on the first as a right and that the first would cooperate. The first time I did a second I had no clue that I should have got an authorization at the time the second was made.
My beef is when people act like they can simply make payments on the first and take over the payments as if they’re entitled to do so. Anyone making a Second Lien note really needs more than just an authorization if the first lienholder is escrowing for insurance. The reason for this is that you would need to cancel the old policy and get a new policy in place and an authorization To receive loan information only would not give you that authority.- 4yBryan HartlenPro MemberInvestor · Phoenix, AZ · Member since 2018 · 315 posts · 157 votes
Quote from @Marco Bario:
Quote from @Adam Walter:
Quote from @Marco Bario:
What are some reasons the junior lien holder would advance funds to the senior? I'm assuming you're saying that a 2nd mortgage holder would pay the first mortgage holder. I'm having a hard time imagining the circumstances. I feel like its good money being thrown after bad money.
…
To fend off foreclosure and to continue to control the underlying asset from a junior position. I would never bother paying a lien that's junior to mine, but I would, and I have advanced loans and taxes senior in position to my lien. In some states, HOA's receive super-lien treatment and move into 1st position ahead of debt liens.
@Marco Bario Can you shed a little more light on how the extra expense of bringing the 1st current would benefit you and how it would result in controlling the asset? If the value of the asset is less than the value of the 1st & 2nd then you’re adding to your deficit unless you see a way for the asset’s value to increase enough over time to compensate for the deficit. Hard to see this happen given that you don’t control the asset so forcing appreciation is hard. If the asset’s value is greater than the value of the 1st & 2nd then FC would result in paying off your 2nd so I’m assuming you’d just let it happen and cash out.
- Specialist · Frederick, MD · Member since 2017 · 475 posts · 454 votes4y
Quote from @Bryan Hartlen:
Quote from @Marco Bario:
Quote from @Adam Walter:
Quote from @Marco Bario:
What are some reasons the junior lien holder would advance funds to the senior? I'm assuming you're saying that a 2nd mortgage holder would pay the first mortgage holder. I'm having a hard time imagining the circumstances. I feel like its good money being thrown after bad money.
…
To fend off foreclosure and to continue to control the underlying asset from a junior position. I would never bother paying a lien that's junior to mine, but I would, and I have advanced loans and taxes senior in position to my lien. In some states, HOA's receive super-lien treatment and move into 1st position ahead of debt liens.
@Marco Bario Can you shed a little more light on how the extra expense of bringing the 1st current would benefit you and how it would result in controlling the asset? If the value of the asset is less than the value of the 1st & 2nd then you’re adding to your deficit unless you see a way for the asset’s value to increase enough over time to compensate for the deficit. Hard to see this happen given that you don’t control the asset so forcing appreciation is hard. If the asset’s value is greater than the value of the 1st & 2nd then FC would result in paying off your 2nd so I’m assuming you’d just let it happen and cash out.
I've never pursued junior liens where the combined investment-to-value of what I'm purchasing plus all senior liens is greater than the value of the underlying asset. Note, however, that some investors do and rely on the borrower's motivation to prioritize a roof over their head as justification. Many refer to this as emotional equity. The greatest risk is being wiped out in bankruptcy.
I view junior lien investing as similar to holding an option - where a small investment creates leverage against a larger asset.
The potential outcomes are many:
1. Pursue a loan modification. Once performing, the whole note can be sold at a higher price, a partial sold, or the note held for cash flow.
2. Receive a payoff resulting from the foreclosure auction.
3. Take title to the property resulting from the foreclosure auction subject to senior financing. Think of your front-end investment as the down payment and ongoing debt service like any other real estate financing.
4. Park the non-performing asset in your portfolio until the borrower eventually surfaces wishing to sell or refinance their property. Some states have statute of limitation laws, but not all. - 4yBryan HartlenPro MemberInvestor · Phoenix, AZ · Member since 2018 · 315 posts · 157 votes
@Marco Bario thanks for the reply. I hadn't considered #3.
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