I have a hypothetical question, I know it’s a stretch but I would appreciate the help.
A home is worth $500,000
There’s a 1st TD for $505,000 from Horizon Bank
And a 2nd TD for $40,000 from Newport Bank
The 1st TD is current. The 2nd TD is not. Newport Bank is now foreclosing on the home and takes it all the way to trustees sale where no 3rd party bids on the property at the trustees sale. Now Newport Bank is the owner of the home subject to a 1st TD valued at $505,000 and the home at $500,000. **The current/true balance on the 1st TD as of the foreclosing date, for simplicity sakes lets say is $505,000**. What does Newport Bank do in this case? Do they have options? If so, what are there options? Do they not pay the 1st TD and let Horizon Bank foreclose on them? Meanwhile, and if I understand this correctly as soon as Newport Bank forecloses, they are legally the owners of the home and can begin the eviction process of occupants who happen to still be living in the home. (However, I’m just thinking out loud here, what if Newport Bank allowed the current owner to keep making payments to the 1st TD so that in the future the balance of that $505,000 would decrease below the $500,000 value of the home and then Newport Bank could sell the home and make a profit?)
Again, all hypothetical but I’d like to get some feedback as I’m just trying to understand 2nd TD’s a little better.
You have it right. The bank’s motive is hard to know. I have seen similar situations and the foreclosing 2nd did a lot of work and got little or nothing for their trouble. Junior lenders have taken a beating during the past few years. I had heard that some people were being advised to stop paying the 2nd becuase of the 2nd would not foreclose. In any event they can send a message and give the borrower the hit to their credit they probably deserve.
Thanks Richard, I appreciate the input.
I personally would be interested in acquiring 2nd TD’s. However, I’m finding in 95% of the case the 1st TD is astronomically large and obviously there is no equity in the home by purchasing the 2nd.
Be aware that the 1st can be more than FR or the actually deed of trust says. If the trustor does not cure the default on the 2nd, then it is likely they have stopped paying the 1st. There were sub-prime mortgages that allowed negative amortization, 125% was not uncommon. And, there is really no way to know exactly what the payoff of the 1st is. I have chased a few of these as they are interesting. There are so many people buying a the auction these days and with a declining market in our area, the margins are smaller. The only deals seem to be on the edges. The problem with edges is that they are sharp and it is easy to get cut.
If I purchased a 2nd TD at an auction, does that wipe off the borrower on the 1st TD and I take over the 1st TD pyt?
I would like to buy 2nd TD’s at the auctions. If I do, do I assume the 1st TD and the borrower is wiped off Title and the property is now mine?
Hi Kelly, You would take title to the property subject to the senior liens and loans. The lender on the 1st could foreclose and wipe out your ownership interest if the loan is not paid in full. The lender on the first is not obligated to accept payment from you and most Deed of Trust have an acceleration clause that would make the entire loan balance due an payable upon the transfer of the beneficial interest in the property. You would need to make sure you have the funds to pay the 1st in full before they foreclose on the property.
Also, if you buy and 2nd trust deed when the borrower is doing a loan modification, the first will not sell to you and when the borrower retakes title on the first he will move back into him home and leave you on title with no payments until he sells…if he does! ?Also, during this time you maybe added to a wrongful foreclosure suit and may end up paying damages in addition to the borrower if he can prove you acted wrongly by purchasing when you knew there was already a pending suit. ? BEWARE!!
ADDED NOTE: ?Don’t think you will make money if there is equity in the home and you are only the 2nd, the 1st can foreclose the home for the full homes value not the amount remaining on the 1st trust deed… why would they give you the equity lol ? In order to save your investment, you will have to pay whatever amount the 1st ( or the borrower with title now after refi) asks of you, or you are holding a 2nd trust that is only worth the paper/ink. ? VERY RISKY!!! ??