Buying a non preforming second lien with a non preforming first

[Dustin Mathenia]

Let's start by saying I am a newbie when it comes to not buying or selling. I am trying to get a feeling for what makes a good deal or a bad deal and the different strategies when buying a non preforming note.

I'm looking at non preforming note in Hawaii. (Second lien UPB 105k) 1st is 425k) both non preformingm The asking price for second is 30k . If I bought the second and started to foreclose what exactly happens? does the 1st non preforming have to pay me off or give me the house ? Or what would be the strategy here? Or is this not a deal ?

[Don Konipol]

@Dustin Mathenia

Hi Dustin, just saw your post. Below is a letter I sent to some of our investors explaining the foreclosure process. I think this will be helpful...

Below is how a foreclosure works in Texas, IF the borrower takes no legal action.

The first step is to instruct the trustee to file for a foreclosure. Since 20 days notice is required, the next foreclosure date will be the first Tuesday (foreclosures in Texas are all carried out the first Tuesday of every month) of the first month after expiration of 20 days following notice.

The trustee will charge for this service, which includes notification, by both regular and certified mail to the borrower, filing of notice of intent to foreclose with the County, and holding the trustee sale (auction) on the prescribed date. The trustee will usually be instructed to bid in on behalf of the lien holder the total of amount of the principal, interest owed, late fees and legal fees, as well as any other legitimate fees incurred by the lender.

Should a bid be received by a third party in excess of this amount, the third party would win the bid and get a trustee deed evidencing ownership after paying the trustee with certified funds. The trustee would then remit the total amount owed to the lender, and remit any overage to the borrower.

If no bid higher than the amount bid in by the trustee on behalf of the lender is received, the lender becomes owner of the property and receives a trustee deed. The lender is then free to do what he desires with the property. The usual is to list it for sale if the lender has no personal use for the property. The lender can sell the property for whatever someone is willing to pay at this point - and keep all the funds even if the price received is substantially in excess of the amount owed. If the lender suffers a loss on this resale, the lender get file for a deficiency judgement against the borrower personally (he has signed a personal loan guarantee).

Even after the foreclosure is initiated, you can decide to cancel the foreclosure and re instate the loan. In Texas the borrower has no right to automatic reinstatement; it is totally up to the lender. If you wish to reinstate after the note is accelerated (called due concurrent with a foreclosure filing) you would typically demand all back interest payments, late fees, legal fees incurred.

However, it rarely occurs this way. More typically, once the note is accelerated, and the borrower is unable to reach an accomodation with the lender nor pay the note off, he will seek advise of an attorney. His first line of defense is to file a motion for a temporary restraining order, or TRO. Depending on the judge, he may get a TRO good for 60 or 90 days. During this time he will not be making loan payments. His attorney will claim all kinds of mis treatment, deed of trust violations, lender liability claims and general breach of good faith. None of this will be true, but it does not matter. The borrower does not have to PROVE these allegations, just alleging them is enough to get the TRO. Some judges will require a bond be put up equal to one or two months mortgage payments, some won't even require this.

Once the TRO expires, the lender will be free to pursue foreclosure again. Notices will be sent out by the trustee, 20 days will expire and the foreclosure auction will be scheduled. At this point the seller's attorney will likely file for bankrutcy protection. Bankruptcy filing provides an automatic stay from foreclosure; even if bankruptcy is filed one minute before the foreclosure auction the sale must be cancelled.

Once bankrutcy is filed the borrower is given an automatic 60 days to file a bankrutcy plan. Ususally by the end of this 60 day period, 5 otr 6 months have now passed and no payments have been received by the lender. If at this point the borrower's attorney requests an additional 60 days to come up with a bankruptcy plan, this is usually automatically granted by the bankrutcy court.

The attorney for the lender can ask the court to lift the stay allowing him to foreclose. However, the lender must usually show that his collateral is impaired in order for this motion to be successful. If the value of the property is significantly above the loan amount the motion to lift the stay will not be granted.

I have originated and serviced in excess of 400 private mortgage loans in the last 14 years. The courts have become much more debtor friendly. I have had a couple of occurances where we received no payments for 2 years until getting back the property. I have had another where the court ordered us to accept a 12 year loan at 6 % interest. The bankruptcy judge is a powerful position, with almost absolute authority.

Please note that Texas has the quickest foreclosure time, and easiest procedures of any state. Further Texas is a NON judicial foreclosure state. Judicial foreclosure states require that a court action be initiated and a hearing held by the court to get a court decision allowing a foreclosure sale to take place. Non judicial foreclosure states do not require a court action, the lender just instructs the trustee to foreclose. However, all states require certain notification procedures be followed, and a certain amount of time elapse before a foreclosure can be filed. Recently, Florida foreclosures has been taking 5 years because of backup in courts. It’s now 2 years. This is on the very long side of time.

Any lien holder, in any position, can foreclose on a property. Foreclosure wipes out any and all INFERIOR position liens; while superior liens and property tax liens stay in effect. Sometimes superior liens will allow the lien to remain in place allowing the new owner to make monthly payments, but most often the superior lien will foreclose wiping out the inferior liens and the equity position of the property owner.

Most often people who sign mortgage notes provide personal guarantees. Personal guarantees are enforceable in all states except for primary residence first liens in California. However, in most cases collecting on the personal guarantee is difficult if not impossible.

Since Dodd Frank and the CFPB, judges have punished holders of paper where the note was originated in some way that violated this act and the agency regulation by allowing the note to remain in force but severing the security interest from the note. So the lender is left with an unsecured promissory note no longer collateralized by real property. Just another risk to consider.