Non-performing second with first in forclosure

[Sandy Uhlmann]

I am a note newbie who was reviewing a recently released tape of non-performing seconds.  I noticed that with this tape, there was very few that were behind performing firsts and nearly half of them listed the first as in foreclosure.  Approx another half listed the senior as not recording on credit or outdated.  Obviously, these loans were very inexpensive but other than that, I am having a hard time understanding the advantage to purchasing a NP second if the senior loan is listed as under foreclosure.  Can anyone shed some insight into this?  Do these get purchased just in the hope that the first gets reinstated or does a loan mod?

[Paul Birkett]

Hi Sandy

You don't mention it in your question but I'll assume that there is no equity cover for the second lien. If thats the case, your only hope (as the future owner of the second) is that something happens to stop the FC sale. 

That "something" can be either:

1. The first gets reinstated or permanently modified.

2. The first agrees not to move forward to FC for some other reason (working on Deed in Lieu with borrower, short-pay or some other solution).

Even if the FC is stopped (for now), it can easily start again. So you need to understand what the likely next 180 days looks like from the homeowner and lender point of view. No lender wants to FC and no homeowner wants to lose their home....but sometimes there is no other way out.

Example 1 - No Equity to cover first: The home is worth $50,000, first lien is $125,000, second lien is $20,000 and FC has been running for 6 months already. 

In this case, there is no equity to cover the first or the second and the chances of the second collecting anything is remote. The homeowner may not see any way out (as he is so far under water) and the first may not be inclined to work with the borrower (for whatever reason). This could be a total loss, but you may collect some nuisance money to release the lien so the title is clear for the next buyer.

Example 2 - No equity to cover second: Home worth $50,000, first is $50,000, second is $20,000. FC just started 2 months ago

In this case, there is some hope. The homeowner is motivated to find a solution and the first has just started the FC file. There is a chance that a deal could be done with the first. 

1. Can the homeowner afford to reinstate - check the credit report: is he employed, have cars and other assets that could be sold to finance the payments?

2. What state is the loan in - NYC 5 boroughs: 5 years to FC. Texas : 2-3 months. You may not want to wait around forever to see a return

Example 3 - Some equity to cover second: Home worth $50,000, first is $40,000, second is $20,000.

This looks good right? The first will get paid off in full and there is $10,000 to go towards paying you in second position......but wait....its not that simple:

Lets say the borrower was 180 days delinquent before the first started FC (thats the minimum in most cases). They may have advanced the taxes for the year and also have the costs of the FC

So, 6 months payments on $40,000 will be around $1500, plus late fees of another $200, plus unpaid taxes of $1000, plus corporate advances to cover the cost of FC $3,000 is a total of $5,700.....leaving just $4,300 to cover your $20,000 second. 

You may have paid 15% of UPB or $3,000...plus servicing, recording etc of $400+....leaving you with a profit of under $1k.

In many cases, the first will have waited longer and advanced more funds to cover legal letters etc etc....so it transpires at the FC that there is nothing to cover your second position and its a total loss.

If you are looking to purchase these assets, you will need up to date credit reports and you will need to have a good idea of how you are going to get out of the deal before you get in. If you cant see a clear exit...there may not be one

Paul