Non performing 2nds

[Joshua Andrews]

So I'm a little confused regarding non performing 2nds. Most I've seen have combined LTV equaling negative or at a minimum 100% equity. Meaning there is no "real" equity protecting the 2nd position.

I've heard various scenarios of workouts with the borrower, settling for less, etc. But how can an investor make money when there is no equity and the borrower wont settle, do a workout or basically tells the note holder to pound sand?

I've heard that yes, you can foreclose from the 2nd position but how would the investor make any profit when there is no equity to begin with? Almost seems your at the mercy of the people who want to cut a deal with you, and the rest you cant do much about. I'm sure I'm mistaken here. Just trying to understand the model.

Appreciate any feedback or possible scenarios from seasoned investors out there!

[Ellis San Jose]

@Joshua Andrews

Excellent question & observation.

The low or no equity 2nd TD strategies revolved around 3 assumptions:

1) Equity is being created if the borrower stays current on the 1st Mortgage.

2) The market is appreciating creating equity

3) The "emotional" where the homeowner will do what ever they can to keep their home regardless if there is any existence of equity.

A note investor with this approach is best positioned if they own a portfolio of notes to "spread the risk". Some will get wiped off in foreclosure or BK. Some will be homeruns where you will get a full payoff while buying the notes for pennies on the dollar. Remember technically you are buying the notes with negative equity, zero protective equity, or perhaps a tiny sliver of equity, so there should be priced pretty cheap as a percentage of UPB. (Unpaid Balance)