What Happens to Second lien if first accepts a DIL?

Question

If a first lien is in default and rather than be foreclosed on, all parties agree to a DIL, is the second lien extinguished as if it had gone through a full foreclosure or does it still exist? If it still exists, I assume that the owner of the first lien has to come to some agreement with the second before clear title can be conveyed if the plan is to sell the property?

Wayne Brooks · Answer

@Dion DePaoli I knew the concept of accepting the DIL in a different entity, just not the exact documents and procedures, and didn't want the OP to think they could do a "straight" DIL, and think they were protected from the 2nd.

Account Closed · Answer

I wonder if the Second lien holder could simply foreclose from the first once they did DIL.

Account Closed · Answer

I saw Armando Monelongo do it on TV;)

Account Closed · Answer

@Sandy UhlmannI am out of my area on this, but maybe the current owner could negotiate the balance on the second mortgage down to an agreeable amount. Lets face it. If the first forecloses, the second get nothing in most cases.

Joel Owens · Answer

As mentioned DIL usually the first mortgage holder will not agree to with junior liens.I guess if the property is in a lengthy judicial foreclosure state and some kind of agreement can be had with junior lien holders it might work.To agree to a DIL the borrower needs to carefully review their rights and under what conditions they would agree to such a strategy.DIL's take some time to do as well. When I did short sales a long time ago the DIL avenue mentioned a 30 to 45 day window to complete.In non-judicial states where lenders can foreclose quick they tend to tell seconds they will give them 1,000 or 2,000 to release their interest on a short sale or other arrangement. If the second balks the first lender generally tells them to go pound sand. Another misconception is if the same bank holds the first and second position. Even if that is true they are different loans and risk structures and the team servicing each loan has their own agenda to make the deal more beneficial to their side.What the current value of this property is for current AS-IS condition versus all the liens stacked owing against it will make a difference. Generally one or multiple BPO's will be ordered to determine value for the lender. There are also servicing protocol guidelines that have to be followed for each loan file. So you as a property investor buyer might want the lender to do XX first as it benefits you the most but they say until X,Y,Z is tried first we cannot consider what you want to do.When servicing a loan there are systematic steps to try from a minor loss to get back on track for the borrower to the most severe losses. Each step has to be documented or insurance loss claims can be denied.

Dion DePaoli · Answer

I suppose to comment on one other aspect of the OP, negotiating a DIL on both positions is probably going to be pretty hard. Senior and Junior would want their related percent of ownership which would give them the ability to recover the loan. Attempting to get to mutually agreed split is probably going to be pretty tough as each would view some type of alienation on title from the other lien's share. Sort of like if the second lien wanted 45% ownership and the senior lien wanted 85% ownership. I suppose the two mortgagees could agree to a common vehicle to take title and then have the pro-rata split but that would be a mountain of work and not likely on a residential asset.

Jay Hinrichs · Answer

@Dion DePaoli interesting... !! will have to research the merged interests.. I could have used that on some of my OREO over the years.

Dion DePaoli · Answer

My last sentence reads funny. DILs which do waive deficiency are common but not are not automatic or mandatory. (that's better)

Dion DePaoli · Answer

A DIL does not mean satisfaction of lien. A DIL can be done and the lien remain. The DIL is given by the borrower and title is taken by the mortgagee under a different name to avoid merging interests. Merging interests here would mean stepping into the shoes of the property owner while being a mortgagee. If done properly the lien survives to foreclose while the property is owned by an affiliate of the mortgagee who will not contest the FC. The lien retains its priority and can foreclose. If the interests merge the mortgagee steps into the shoes of the property owner which is inferior to the remaining lien and has foreclosure risk. Just because a DIL is obtained doesn't mean foreclosure is vacated. A DIL also does not always mean deficiency is waived. The latter of those two ideas is pretty common.

Wayne Brooks · Answer

If the first Mtg accepts a DIL, the second mortgage is now the first Mtg, with the former first mortgagee being the owner. So, the second would then have No reason to negotiate as there is ton of equity. Any negotiations with the second would obviously need to be done prior to the DIL, just like in a short sale.