Question on a NPN 2nd Note

[Howard Cheung]

I have a question on what to do with a NPN 2nd Note. I would appreciate it if somebody can provide some insights. I currently hold a 2nd NPN subject to the 1st note(current) on an investment property in Upstate NY. The note is more than 120 days late and I don't actually want to foreclose on the property because of the amount of money that it will take to do so and the borrower isn't open to a deed-in-lieu of foreclosure. The 1st note, as I stated, is current and is between me and the bank and I continue to make payments on it because I would like to protect my credit.

What is the best course of action(what would you do)?  Anyway I can sell this note at a respectable amount?

1st note is about 35K
2nd note is about 44K

Any advice would be greatly appreciated.

[Dion DePaoli]

Well sorry to hear your attempt to wrap this loan seems to be failing.  There is no magic answer here that you will like.  

It sounds like your borrower has told you to go pound sand and is not going to try and bring the account current and has no interest in surrendering the property back to you.  

Since the borrower is the title owner of the property and they are not willfully surrendering the property to you, the only remedy you have is foreclosure.  

The borrower you put in this loan has all the rights and protections as every other consumer and primary residence property owner.  

Your note, IMO, is worthless.  

It is not clear if on the underlying mortgage you are the original borrower or not.  If you are, then there is a small chance they will see your foreclosure on borrower 2 as zero sum event and not take any action.  On the other hand, they are within their rights to accelerate your loan upon any foreclosure action on a junior position regardless of who is who.  In that event, you would need to pay them off in full or they will foreclose you.  

This is ancillary to the risk of the underlying mortgage triggering due on sale at any point moving forward with acceleration and foreclosure again for the balance due.

So in the scheme of things the capital needed for this deal exceeds what could even potentially be recovered from the deal. Payoff the loan at $35k. Foreclose in NY for $2k over 2 years which is every bit of another $4k. Not to mention any expenses on the REO. Ergo, your loan is worthless.

My advice, find the money to pay for foreclosure.  Hopefully as that sets in the borrower may have a change of heart and offer a DIL.  Though, I have often thought most wrap borrowers are both a flight and credit risk.  If they just take off, you still legally have to foreclose because you no longer have equitable rights to the property.

If you are not the original borrower of the underlying mortgage, you can be found liable for failing to satisfy the demands of the underlying mortgage if they come due.   At the very least, that borrower is not going to be pleased with the potential foreclosure on their credit.

If you are the underlying borrower, then foreclose and work with your mortgagee and hope they see it as a zero sum. You violated the DOS but cured it.

That is probably a hard pill to swallow. I am guessing you didn't see any threads here on why NOT to play with wrap around and subject to mortgages. The "pro"'s are happy to tell you how to do it, just not what happens when it all falls apart.  Best of luck.