NP second in Kansas: Cross Claim or answer out of time?

Question

I have a NP second in KS.  Currently there is equity in this home.  According to Netronline, the first has initiated FC (in April) but now, according to court info the case is "on hold for loss mitigation"  I contacted the attorney of the first lien holder and she was no longer with that firm.  When I contacted the firm that is handling the FC they said they were told to put the case on hold-they assumed that they were working things out with the borrower.

I was advised to initiate FC from the second position just to get the process started in case the first drops their case thus I am the next in line (so to speak)

Just got off the phone to an attorney who suggested that instead, I file either an "answer out of time" or file a cross claim into the Sr. FC so I go on record as owner of the second.  I was under the assumption that as the owner of the second if the property went to sale and their was excess money It would automatically be paid to the second.  He said that this is not the case.  He spoke of buyouts and that can occur and that if there was any equity left that the borrowers can assert that equity as theirs even if they have a second that they have not been paying on.

As it stands now, it appears that the borrowers are contesting a lot of the first's FC issue and that being said, I assume that the first has been racking up a lot of attorney fees that would add to the total bill    and eat into any equity that my second ever had in the property.  Additiionally,  I was quoted an attorney bill of $2700 plus $215/hour if my second gets contested.  I asked him if I could even just send out a demand letter ($100) but he said that this would do nothing.

I don't completely understand the "answer out of time" or the filing of the cross claim.  I have a general understanding of what they are but not really how it is going to help my case.  I don't know if I should spend money on this loan or not?  Great looking house in a nice area of Overland Park, KS.

Does anyone have any advice on how to proceed?  I guess it is just not as simple as filing for a FC on the second in KS.

Dion DePaoli · Answer

Well good, we can stand down from DEFCOM 5.  No BK.  That we know of.  Keep an eye on that.  If they filed and were dismissed, they certainly know it is an option.I think from my observations of clients we have worked with that have gotten into second lien investments there is a tad of stage fright in moving forward full force with FC. Perhaps it comes about as a function of the mentality to get into these second liens and THEN figure out what to do or from too much romance around reinstatement.  It seems we want to hope to see a very clear path of recovery.  Often times you have to cut your path through the mess and not expect the road to open before you.  These are muddy roads not well understood by many newbies.Get your notice of default out the door.  Get a copy of the total payoff on the first.  Again, you may have to have an attorney lead that charge.  File the cross-claim to preserve your interest in subject property and be known to the court.  If the borrower doesn't want to deal with you and pay - file foreclosure.  These are not things you do "if" you can collect, these are things you do "so you can" collect.  As food for thought, a junior lien who doesn't assert their rights derived from their security interest in the property can actually lose those rights.  This means, that by failing to actually file these actions, which is not limited to the cross-claim it may be necessarily to actually file FC, you can alienate yourself and lose your right of redemption and right to surpluses from sale.  To that extent, sitting quietly, as far as the court is concerned, can be a very bad move resulting in loss of potential recovery that could have been realized.

Patrick Desjardins · Answer

Really depends on what the actual numbers are. Legal fees and court costs are often exaggerated on this forum. If the UPB is 250k and they missed 2 years payment / taxes, with the house valued at 320k, then yes it's unlikely that there is no equity and she would get wiped in BK. If the house is worth 280k then it's likely there is very little if any equity.

Kansas taxes aren't CT / NY / NJ level.

Racking up a 40k bill is pretty tough. This isn't a murder trial with witnesses etc. It's attorneys filing motions and charging 2-3 hours + court costs.

Dion DePaoli · Answer

"Answer Out of Time" refers to the time allowed for a "Answer" to the "Complaint" which is the filing of foreclosure process.  When you start foreclosure in a judicial setting you file a "Complaint".  The interested parties then have a defined time to respond according to statue. Overages from foreclosure sales require claims to be filed.  They are not automatically handed out.  This does give way of an idea of what is equitable for all parties and 'could' result in a reduced payment to other lien holders.  That said, you are still in second position and have a stronger claim than that of the borrower.As a lien holder you have an interest in the property and you have a right to protect that interest by advancing funds to secure your position.  This includes advancing to payoff an accelerated first lien.  You would have to pay them in full and then could claim those funds in your suit against the property and borrower as funds needing to be recovered from the property.  Obviously, this could have a barrier based on available capital to advance paying off the first.  It is never a good idea to ignore default.  That creates a precedent the borrower in some cases use against you.   Have a Notice of Default sent out so you start the clock to be able to issue an acceleration.  Once you have issued the acceleration you will be able to file a complaint.  The "Cross Claim" is you ascertaining your right as a junior lien holder and interested party in the real property.  It is a direct function of the first lien filing foreclosure.  It creates a situation where the Borrower also has to answer to your claim as well as the first.  It also alerts the courts that you are interested in property and seek recovery as well.  You still may be required to file for a claim on sale surpluses but with a cross claim you ensure you are noticed of the proceedings and actions in the case and the court knows explicitly who you are.As far as what to do.  It is tough to say with out definitive description of the potential equity you may have claim to.  In other words, is there enough equity for you to get a piece?I would send NOD and continue to move forward as if you have to foreclose.  You have to give them time to cure.  So while that takes place you will want to get a hold of the amounts due on the first to see if you have a chance at equity.  The alternative of the first vacating their foreclosure plays to your hand in being able to foreclose and have your best shot at recovery.  It might help to understand why the first vacates if they do.  (perhaps unenforceable or something)  You filing a standalone foreclosure would give way to a new potential complaint from the senior lien for alienating title or Due on Sale.  It may be valuable to look into pursuing a deficiency judgement as a way of collecting as well.  Off the top of my head I can't remember if they are allowed in the subject property state.  If they are, that gives you some additional collection leverage onto the borrower.Good luck.

Patrick Desjardins · Answer

Step 1 - look on pacer if they previously filed a bk

Step 2 - review main fdcpa rules

Step 3 - call the borrower and ask them what happened, what's going on with the first foreclosure, how are they doing now.. Try to build rapport

Step 4 - ask them what they would like to do

Step 5 - if they don't mention specific outcomes (ie short sale, file bk, do a loan mod) then immediately send the demand letter and reassess your options.

The attorney who told you it wouldn't do anything is an idiot - it gets the clock ticking so you CAN start the FC if you need to. Just IMO.

Account Closed · Answer

The missing piece is what did you pay for your NPN ? That would determine your course of action .On the surface there does not appear to be enough equity to cover the $25000

Sandy Uhlmann · Answer

I guess part of being a newbie in this business is not knowing when to push forward when thing appear bleak vs when to cut your losses.  This, quite possibly, may be a very typical situation in 2nd mortgages.  Perhaps I do need to wake up and realize that this is not an uncommon situation with theses 2nd mortgages and I either get tough, or get out,  ( I don't plan to get out!)

I guess It would be helpful to hear from others that have been in a similar situation and have come out on top.

@Dion DePaoli, @Patrick Desjardins, @Chris Dawson Account ClosedThanks again everybody for all the input!  I always get a great education on this Forum.

Patrick Desjardins · Answer

That's the spirit!

You need a thick skin and you'll sleep better when you "let go". Not every note is going to be a winner. Many of the borrowers are unsophisticated and hurt themselves.

As far as cutting your losses, foreclosure doesn't always make sense right away but sending the demand letter does. For $75-150 it sometimes has a lot of impact and you need it to start the FC so why not send it asap. I've added that expense to any note I buy's price.

My friend @Bill McCafferty posted his stats the other day. 60% resolutions, most of which come late in the foreclosure. A lot of time people only wake up when they're against the wall.

Just a reminder, for us foreclosure isn't the objective. It's just leverage to start negotiating with them. But yeah you need a thick skin because on underwater notes sometimes it feels like you're driving 100mph into a wall. That's why my personal strategy us to buy notes from different classes, some of which are much safer like first mortgages. It balances out.

Sandy Uhlmann · Answer

@Dion DePaoli

I'm sorry.  I meant to say Foreclosure was filed in April of this year and was put on hold November of this year.

Dion DePaoli · Answer

So if we extract the information around the balance and equity the first lien has an unpaid balance of $225k and we don't know what additional interest and fees add up to on top of that.  Your second lien has a balance of $25k.  It is not unreasonable at all that the first may have interest and advances exceeding any available equity.  The Last Payment [Made] Date is not the same as the Last Payment Due in the amortization schedule.  I could make a payment in December of 2015 for December of 2013.  Thus I am behind 24 months and all that interest has been accrued.  Additionally, as you mentioned this is not their first attempt at BK so there are likely fees associated with that defense along with any prior foreclosure fees whether that action was vacated or not.  Not to mention any taxes and insurances which may have been advanced.  So, like I said, not unreasonable that the first's claims leave you with little to no equity to attach to.Moral of the story, you need to obtain the first lien's payoff balance.  You need to get it in writing and not rely on the phone line as official.  This may require you having an attorney demand the payoff with proof of your mortgage interest in hand.

The BK thing I asked about above may provide you with a path to recover some money.  If they filed for BK then you will need to work on filing a proof of claim.  Relatively straight forward but speak with a BK defense attorney.  In addition, the BK can provide you with insight as to what is totally due on the first as total payoff, term and rate are all required in proof of claim by statue.  The borrower filing BK may not be a bad thing for you and will at the least provide you with a possible solution to recovering some monies.  As I said above, do not be thinking of making ANY contact with the borrower until you determine if a BK petition has been filed.  Failure to abide by the stay is a violation of the law and carries stiff penalties.

Dion DePaoli · Answer

I didn't understand what you meant in your follow up post @Sandy Uhlmann :"The first filed for another BK in April of 2015, last note from the court was November 2015 when it is noted that case is on hold for loss mitigation."The "first" did not file a bankruptcy, that would be the borrower.  So if the Borrower filed for a BK then you have an automatic stay and NO ONE should contact the borrower.  You would need the stay lifted before any borrower contact can be made in regards to collect any type of debt.The first position along with yourself are both in loss mitigation.  That is simply the period where the loan has defaulted and special high touch servicing takes place to attempt to resolve the default by the allowed remedies.  Did I read that right in regards to the BK or did you mean a foreclosure which has stalled for specific loss mitigation remedies to run their course like mediation?

NP second in Kansas: Cross Claim or answer out of time?

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