2nd Liens, BPO, and Equity

[Mark Welp]

Hello,

I am in the due diligence phase of buying a performing 2nd lien note. The homeowner has been in the property for 15+ years and is current on the 1st and 2nd mortgage, which is good. I did a BPO (as this is my first 2nd, probably did not need to) but how worried should I be that the BPO value came in a lot less than the combined UPB on both the 1st and 2nd combined (therefore, no equity in the home at all)? I know for 2nds that you focus more on the borrower than the property, but do people worry about that (no equity on a 2nd)? Thanks in advance.

[Patrick Desjardins]

Originally posted by @Mark Welp:

Hello,

I am in the due diligence phase of buying a performing 2nd lien note. The homeowner has been in the property for 15+ years and is current on the 1st and 2nd mortgage, which is good. I did a BPO (as this is my first 2nd, probably did not need to) but how worried should I be that the BPO value came in a lot less than the combined UPB on both the 1st and 2nd combined (therefore, no equity in the home at all)? I know for 2nds that you focus more on the borrower than the property, but do people worry about that (no equity on a 2nd)? Thanks in advance.

 Obviously, yes. If there really is no equity or It's close (5k-ish) and they file for bankruptcy, you can be stripped. But I think you're misunderstanding what that means.

The way you phrased it isn't clear. Combined LTV isn't as important as equity above the first.

100k house, 120k first, 40k second = no equity

100k house, 90k first, 40k second = partial equity, shouldn't get stripped

You don't need "equity in the house", you need equity that protects your position. The more you have the better since you would recoup more at FC sale/REO but it sounds like you're buying a performing note.