Another 2nd mortgage settlement question (DCU)

[Brazzy]

Well the thing is that a lending institution that sits on the seconds will not let you bully them. If you are looking to settle on the second then you already showed interest in keeping the property that it is worth something to you. A good negotiator for a Jr lien holder needs to be tough. The bank has already determined that the account will be a total loss and the negotiator needs to have the "nothing to lose" attitude. When the bank charges something off they budgeted and planned on that to happen and anything above it is gravy. Someone comes to me claiming they will let the first foreclose and of course ( I hate hearing it cuz it changes nothing) that if the first forecloses the 2nd will get nothing. A good negotiator will reply with something along the lines of... "OK". The natural response by the debtor is always to be shocked, but thats how it has to be. There are lenders just settling for any offer that comes across the table because they are not ready to take a loss, but they need to be. The catch is that the debtor who threatened to let the house go to foreclosure is typically not ready to let the house go either. They formulated a plan and thought out a way that they thought they could find a way to keep the house AND get it out from under a second for pennies on the dollar. In my experience the debtors are at a point of high hopes and typically are not ready if their bluff is called.

[iv65536]

Because of the first mortgage taking $145k. The first has to be paid in full before the second gets a cent. He is talking about a second in which he owes $137. If the foreclosure took place and the sale was for $200k. The first would get its $145k and the second would be left with what he estimated to be $45k after legal fees and paying off the first.

And then you have the fact that the first would not particularly care if the second got anything. Which is why I view threats to stop paying the first as a viable tactic in negotiating with the second, especially if there would be nothing for the second.

[iv65536]

One thing I will be is honest. It may not always be what you want to hear, but it will be how most lenders handle the situation. If you call your lender they will tell you how it is. The only difference is I will try to explain why it is it is what it is.



Basically a home become past due (60-100 days depending on the lender) and they will start to look at the potential for foreclosure. At that point they will do an analysis. They will do an evaluation of the home to some extent (drive by appraisal, BPO, AVM, etc). They will pull title and get an update from any SR lien holders as well as an update on the tax situation. The banks have a formula to get an idea what the recoup would be from foreclosure. That differ bank to bank but it would be something like:

Home value X 70-85% = recoup from sale
- legal fees
-back taxes
-Sr lien holders
-------------------------
Recoup

With that figure they make the determination as to whether or not a foreclosure should be pursued. This process is followed regardless if a BK is filed or not. The only difference is the collection efforts during the process and collection efforts after the process. Loans included in BK are sat on while the charged off loans not in BK will go to in house collections, collection agencies, attorneys, etc.

And this is part of the reason why the interest-only first mortgage has been so useful here - I made sure the second knew it it was junior to an interest-only note, and that if push cane to shove, I would simply stop paying the first. I offered them a penny on the dollar, but given that the value of my condo is no certainty to exceed the balance on the first mortgage, the fact that they were seeking a much larger payout was, in my view, denial of economic reality. I also think that I have made my disdain for their bargaining stance perfectly clear.

What's more, they never completed the W-9 I asked them to fill out.

[pcn]

That's where I missed it - he was talking about what the 2nd might get. So not as nice as negotiating to release a lien on a 2nd with no equity, but may be able to get out if the 2nd is reasonable.

[Brazzy]

Because of the first mortgage taking $145k. The first has to be paid in full before the second gets a cent. He is talking about a second in which he owes $137. If the foreclosure took place and the sale was for $200k. The first would get its $145k and the second would be left with what he estimated to be $45k after legal fees and paying off the first.

[pcn]

Yes, I understand that part. But the poster above (BCA2009) said "But ignoring legal fees that would be $48K max that they could get out of foreclosure". I was wondering how they thought it wold be that low.

[Brazzy]

Easy. Foreclosure is not like a typical sale. If a home appraises for $205k. The recoup when its all said and done will be more like $143K after the foreclosure sale and legal fees. The hit is that big. He is talking about settling the second lien, not the first.

[pcn]

I'm sure I missed something here. If they can sell it for 205k, and you owe 145k, why wouldn't the get their 145k when they foreclosed?

[BCA2009]

Again, thanks for the candid replys, even thought it might not be what we want to hear. If you don't mind, let me give you my situation and tell me what you think.

Sell price at best 205K before any fees, so assume 6% realtor fee (I think that is the going rate around here).

So net around 193K.

I have a first of 145K. I have no idea what foreclosure legal fees would be. But ignoring legal fees that would be $48K max that they could get out of foreclosure. I really think it would be less because they would have to sit on the house for a while to get 205K out of it.

I would be willing to pay them $40K - $45K. So I would give them close if not as much as they could get from foreclosure. I owe them 137K on the second (discharged).

I haven't contacted them and I am going to wait it out until they contact me about foreclosure. who knows when that will be.

Thanks for any thoughts,

[Brazzy]

thanks for being so frank. it helps many here who are trying to put there lives back together.

One thing I will be is honest. It may not always be what you want to hear, but it will be how most lenders handle the situation. If you call your lender they will tell you how it is. The only difference is I will try to explain why it is it is what it is.

i have another question. from your standpoint when does a 2nd consider itself unsecured and not worth forclosing ?? bal of 1st + additional costs ++ ?? Since there could be considerable additional costs for the foreclosure + rehab of the property, attorneys fee's etc ?? also if the loan is discharged in BK and the debtor is not paying and it meets the underwater criteria, do they just automatically charge it off and sit on the lein/sell to a Debt buyer ??

Basically a home become past due (60-100 days depending on the lender) and they will start to look at the potential for foreclosure. At that point they will do an analysis. They will do an evaluation of the home to some extent (drive by appraisal, BPO, AVM, etc). They will pull title and get an update from any SR lien holders as well as an update on the tax situation. The banks have a formula to get an idea what the recoup would be from foreclosure. That differ bank to bank but it would be something like:

Home value X 70-85% = recoup from sale
- legal fees
-back taxes
-Sr lien holders
-------------------------
Recoup

With that figure they make the determination as to whether or not a foreclosure should be pursued. This process is followed regardless if a BK is filed or not. The only difference is the collection efforts during the process and collection efforts after the process. Loans included in BK are sat on while the charged off loans not in BK will go to in house collections, collection agencies, attorneys, etc.

[albacore44]

Yes they could. However the scenario is basically under the assumption that you are not current on the first. It is easier to foreclose from first position than from second. Typically the first mortgage will carry taxes and insurance. The second will only be PI, and in some cases interest only. A lot of people struggle to keep up on their PITI $1600 a month first, but can easily afford their $150 a month I/O second. Its essentially the fact that when push comes to shove the second wants to be the one in control. So if there is an issue with foreclosure, they want to be the ones to do it. If the first is current and the home is worth foreclosing on from 2nd position they will go ahead and foreclose. If the home is not worth foreclosure from the 2nd position then they will simply charge the loan off and sit on the lien. They will not want to invest more money in something they already deemed to be a total loss.

thanks for being so frank. it helps many here who are trying to put there lives back together.

i have another question. from your standpoint when does a 2nd consider itself unsecured and not worth forclosing ?? bal of 1st + additional costs ++ ?? Since there could be considerable additional costs for the foreclosure + rehab of the property, attorneys fee's etc ?? also if the loan is discharged in BK and the debtor is not paying and it meets the underwater criteria, do they just automatically charge it off and sit on the lein/sell to a Debt buyer ??

[catleg]

Brazzy you know your stuff.

[Brazzy]

Yes they could. However the scenario is basically under the assumption that you are not current on the first. It is easier to foreclose from first position than from second. Typically the first mortgage will carry taxes and insurance. The second will only be PI, and in some cases interest only. A lot of people struggle to keep up on their PITI $1600 a month first, but can easily afford their $150 a month I/O second. Its essentially the fact that when push comes to shove the second wants to be the one in control. So if there is an issue with foreclosure, they want to be the ones to do it. If the first is current and the home is worth foreclosing on from 2nd position they will go ahead and foreclose. If the home is not worth foreclosure from the 2nd position then they will simply charge the loan off and sit on the lien. They will not want to invest more money in something they already deemed to be a total loss.

[subking]

Ok, but if you stayed cuurent with the first won't the second forclose on you anyway and force the foreclosure to get you out and get whatever they can now instead of over 20 years.

[Brazzy]

Subking. That stuff happens, but its rare. I will take your example and work with it. If a house on the open market appraises for $100k then the expected recoup after sale, commissions, legal expenses etc is around $70k. That means the 2nd, who already has $40k invested now pays an additional $70k to buy out the first (now up to $110k invested) only to foreclose and recoup $70k (the first wont take less than what they could recoup from foreclosure)? Thats not really how it works.

For the 2nd to buy out the first most common scenario you would find is something like this:

100K owed to the 1st
50k owed to the 2nd

Home valued at $150k.

Customer defaults on the first and the first starts foreclosure. The second does not want this scenario to take place. If the first initiates the foreclosure they will only work to cover their own ass and not a penny more.The first will basically want to move it along as quickly as possible and just get their 100k back with no regard for the second. Typically in this scenario the second will end up with little or nothing. The second may decide to go ahead and buy out the first (possibly at full balance (100k) and initiate the foreclosure themselves with the intent to recoup as much as possible through foreclosure. Lets say they recoup $130k from the foreclosure, they just saved themselves $30k by buying the property and foreclosing themselves. Thats whay it is very common for lien holders to become concerned with property tax issues. City takes the home to sale they dont give a rat's ass about the lien holders. They will typically pay the taxes up to date to avoid any BS.

You dont see these scenarios as much anymore because the housing market is so depreciated that most homes with multiple liens dont have the value to cover the first lien holder.