Considering to Buy 2nd non performing note

[Gary Zit]

Hi all, 

Looking for advice on purchasing of a 2nd non performing.

Note is for 4 bedroom , 3,000 sq feet miramar, florida, 33027.

Note seems to me have partial equity.

Property BPO $350,000

First Mortgage is convensional. current balance $270,000 and is current for the last 1 year, and was modified. Original balance is $440,000

Second lien pay off amount  is $108,000.

I'm being offered this note at %16 of 108,000 . 

I'm concerned about couple of things:

1. Original balance of the 1st liend is 450,000 and it was modified. Since balance is shown as 270,000 could there be a balloon payment not shown on the credit report ? If i'm forced to foreclose property it will strip the 2nd lien. Callling 1st mortgage company did not bring much of success.

2. This is a florida property and since november 2013 it became judicial state. Anybody had experiece with foreclosure in florida ?

Is there anything else i should be concerned about ?

Thanks in advance, Gary.

[Dion DePaoli]

I have a couple mins so lets walk through this one:

Property Value = $350,000

First Mortgage = $270,000

LTV = 77.14%

Second (Subject) Mortgage = $108,000

LTV = 30.86%

Total Mortgage Owed = $378,000

CLTV = 108.00%

Credit = 625

Ask Price = $17,280

The first lien being modified does not automatically mean a balloon feature is included or has been added in the loan. The "Modification Agreement", which should be of record, will have formally restructured the loan. If the agreement lowered the balance from $440k to $270k then the Borrower only has a principal balance of $270k. The difference of $170,000 is no longer a part of the Unpaid Principal Balance which means it is not subject to the terms of interest. It may be forgiven in full or with stipulations or not at all.

I don't want to drive off on a tangent about the forgiven principal.  Moral of the story, you need to read the Modification Agreement on the first to understand what the "new" loan terms are. The $170k could be remaining in a silent position and it could be due at the end. That is a big detail that is not clear in the post.

When a Mortgagee seeks to enforce the Security Instrument through foreclosure that is not "stripping" anything. Stripping is the wrong word and wrong idea in the context being used. The lien, any lien in priority, simply initiates the foreclosure process.  Liens junior or inferior to the Subject Lien will be given a right of redemption. That may be pre or post Sheriff Sale. Once the redemption period has passed, that lien holder's interest in the real property is extinguished by the completion of the Sale unless they choose to redeem.

A junior lien holder with the power to foreclose can foreclose for the amounts due upon default or breach of contract, etc. Upon sending the Subject Mortgage to auction, post auction the Subject Lien is extinguished and the Mortgagee receives the sales proceeds or the property title. The foreclosing Mortgagee is not "stripped" as his lien stays through the end of the process serving as the point in the title chain where superior or liens with priority are unaffected and liens which are junior/inferior or lesser priority are removed having been given a chance to redeem. Foreclosure by definition is the termination of the redemption rights of an interested party to property.

I suppose that may seem like splitting hairs but the idea of stripping, which is a 'thing' is not this thing. Details matter to make sure you are thinking about this correctly.

Florida has been a judicial foreclosure state (Lien Theory) for a very long time. The foreclosure statue dates back to 1838. The state initially was following Title Theory but that eventually was changed to Lien Theory. The process of foreclosure which is commonly talked about as being "judicial" or "non-judicial" actually stems from the theory of title each state adopted. Moral of the story, #2 OP Statement above is not a real date that matters here.  In November of 2013 we had Thanksgiving. That is about it.

In regard to what to do with the file. The detail here is less than desired. The core concepts, which are the same for all loans are pretty straight forward. Get paid by borrower or use security instrument to enforce debt for default or breach. In our case, we do not understand why the first is supposedly current and the second is not. The modified amounts due for the first per the OP are a little suspect. Typically first lien mods were taking place but generally did not often forgiving so much principal that the borrower would get a blessing of equity. Here, we see the first lien is at 77% of value. We would expect that to be much higher. Since the first lien is a bit of a fixed variable here, I would say revisit the property value. It may not be worth $350,000. A way to look 'back' at that is, when the loan was modified (by the date on the agreement) that new loan balance should have been usually not less than 90% of property value. Most of the time those terms were more like 110% of value. Here, we have the first forgiving $170k that it seems like it did not have to. The story details inside the first lien are important and they are not clear here. The millisecond the first forgave all that extra money, the second lien's position improved. As I mentioned above, what happened to the $170k is important to understand and should be found in the recorded Modification Agreement. Let's assume it is gone for a moment.

Next, we do not understand how long the second lien has gone unpaid by the borrower. Again this matters in the story. With the idea of modification we just explored, any second lien holder should have known they have equity (a sizable amount if value is true) to enforce their lien. Why has foreclosure not been carried out thus far? The longer the duration of time that it could have, the more concerned I would be. Again, there is equity it seems. If the first mortgage responds with a foreclosure action themselves, there is still $80k of equity which some will erode due to advances and interest but not likely all of it. For ease of conversation let's just cut the number in half. So, if the first forecloses, you are in the ballpark at recovering up to $40k on the Second position. Obviously caveats go with that, like the property trading at auction for an amount equal to the BPO value. Not usually the most likely. So, if the property trades for 90% of value at auction (not super likely either), you stand to recover more like $5k.

Pause there to take note, the capacity to recover $20k does not mean it is the most likely.  Price pinning by some Sellers seems to lead astray and point to the hopeful idea of recovery instead of a conservative idea.  If there is no bid at auction that exceeds in a first lien foreclosure you get $0.  I could see an investor making a bid up to around $20k on the second lien at auction.  That would give them a little equity when paying off the first and be in a decent spot owning the property under market.  Probably won't see too much higher than that and it could even be a little less.  But, I think we are in the ballpark.

It seems the asking price of $17,280 is too high. Bare in mind, we have not really broke out the costs that will be incurred defending and enforcing the second mortgage either.  For ease of conversation let's just throw $10k at it.  That puts you needing to purchase below $10,000 in general.  Almost half of where the Seller is right now.  

I don't want to over glorify the idea of buying a loan and magically making it start to perform again. In this example, that idea may be being used to justify a price that is too high for this loan. He is not paying now. That is what matters. The chances of reinstating a borrower are lower than most tend to seem to think. The Borrower is making a conscious effort each month to pay his First Mortgage and not his Second. We do not understand how long that has been happening but it is in some general sense there is a barrier to reinstatement otherwise it would have been accomplished. If the current Seller of this loan managed to get the loan to re-perform and then tried to sell it at the $17k, we might be able to come to terms or at least closer terms with the price. We would be able to broach quantifying that a little better with more finite details. In general, looking to the Borrower's capacity to pay and continuity of payment to earn back our negative equity. If the Borrower is paying say $500 a month, then it will take almost 3 years of payments to cover our investment. Say around half that time, so 1.5 years, to have funded the expense reserves to enforce the lien. (as an idea of investment not a legit reserve account) So, 4.5 years from now, upon payments being made the risk of loss on the second would be dropping significantly. That is also 4.5 years from now and depends on payments made. That is not where he is today. In default means the expenses to enforce your lien are here now. That has to be way the look at the price unless you just want to burn your money.

If the $170k forgiven principal is still present and is required to be paid off, there is a decent chance a Second Lien can contest those monies as being unfair amounts due under the current (mod'ed) mortgage in first position. So, not overly concerned about it by way of foreclosure but outside of that, the discretion to take less is up the Mortgagee which obviously would affect the Borrower's capacity to sell or refinance the property. Thus affecting the Second ultimately.

In recap, understanding more about what the modification did is important. The elusive $170k is a detail to be concerned with. The general asking price seems too high. At a lower price the deal could work but that price is likely closer to 3% to 5% +/- of the balance not 16%. Remember, buy the loan in the state it is in today not the hopeful state it may or may not be in the future. Good Luck.