Why jr. Liens can be problematic when in 1st position

[Chris Seveney]

This was a great question. Somebody asked me yesterday. They asked, “why do you care about junior lies when you are in first position?“

There are several reasons why this is important:

1. It typically takes away your exit strategy of a deed in lieu of foreclosure

2. If there is little to no equity, the borrower may not be able to sell the property on the open market because it would require cash at closing.

3. Second position lienholder have done some shady stuff in order to delay a loss, including filing suit against all parties or trying to obtain a temporary restraining order.

I have had every one of the above come into play, which has caused the timing of exiting the asset to take longer than anticipated. As you know, time is money in this business.

So if someone tells you, it does not matter about liens behind you - it does.

[Jay Hinrichs]

Quote from @Don Konipol:

Quote from @Chris Seveney:

This was a great question. Somebody asked me yesterday. They asked, “why do you care about junior lies when you are in first position?“

There are several reasons why this is important:

1. It typically takes away your exit strategy of a deed in lieu of foreclosure

2. If there is little to no equity, the borrower may not be able to sell the property on the open market because it would require cash at closing.

3. Second position lienholder have done some shady stuff in order to delay a loss, including filing suit against all parties or trying to obtain a temporary restraining order.

I have had every one of the above come into play, which has caused the timing of exiting the asset to take longer than anticipated. As you know, time is money in this business.

So if someone tells you, it does not matter about liens behind you - it does.

There’s one more ; the borrower has increased debt service and when it either turns negative or leaves nothing “in their pocket” they may lose interest in the property, decide to stop paying all mortgages, and put whatever income they can into their pocket until they lose the property to foreclosure or one of the lenders obtains a court order prohibiting such. 

Don, one little tidbit,  when I was very active buying courthouse steps, and pre foreclosures I would find that borrowers would pay on the second but not the first .. So some 2nd were blind sided by the default or foreclosure since they were getting paid all along. And of course the vast majority if not all got wiped out when I bought at the steps.. However when I would do work outs it could be a challenge for private second holders to understand the pickle they were in.