2nd Allowed To Buyout 1st(may Be A State To State Issue)
If I am the holder of subordinate debt, and some sr debt defaults. Do I have the contractual right to buy the senior debt and protect my interest?
e.g.
1st 190K
2nd 5K
If I own the 5K lien, and the 190K lien defaults, must I have the chance to buy it?
yes.
I have this question pending w/ an atty. It's subtle, but key on the buy v. bring current.
Thanks.
It probably varies state-by-state. In Illinois, any subordinate credit can payoff senior liens in full or make required payments in order to protect their position.
Yeah, I didn't think the one-word answer was going to fly without objection. All persons in the chain of ownership have the right to pay off persons senior them and assume their position.
Imagine all the persons with an interest in a parcel standing in line in order according to the "seniority" of their claim. The property gets sold. Each person gets 100 cents on their dollar until you run out of money or reach the end of the line. The last guy in line is the owner. He gets whatever money is left. At any time he has the right to pay off all the people in front of him in the line.
If you are in the line someplace you can, likewise, pay off the people in front of you. You can add the cost of paying them off to the amount of money owed you by the guy at the end of the line.
But what if there isn't enough money to get to the end of the line? Then somebody toward the front of the line files foreclosure. They go to court and essentially ask that everybody behind them in line go away. The guys in the back of the line have the right to pay off the guys in the front of the line and add the cost of doing so to their claim.
This is why when you foreclose you have to give notice to the 2nd mortgages etc. who stand between you and the owner.
So the order in which people stand in the line is determined by politics. In other words, who owns the biggest guns or has the most money to spend on lobbyists.
The front of the line is always the IRS. This is because they work for the Federal Gvt. and they own the biggest guns. Generally, however, the IRS is willing to get out of line in the general interest of keeping the economy running.
After the IRS is the State (i.e. tax liens) which has smaller guns but more prisons. So they put themselves in front of mere bankers who only have fountain pens and lobbyists.
After the Sate comes (as a rule) mechanics liens. This is because the government in their wisdom have determined that the plumbers and carpenters of the world are necessary to the efficient functioning of the economy and should be protected from bankers who have better attnys.
Next comes the array of first and junior mortgages.
Finally comes the poor property owner who's real rights in the matter are the right to pay off everybody in front of him in line.
Now then, the point is that anybody in the line has the right to pay off all the people in front of him. Otherwise a $200 plumber's bill could foreclose on everybody else and there wouldn't be a thing anybody (other than the owner) could do about it until it came to the sherrif's sale by which time there would be another $5,000 in fees. Clearly the bankers of the world are not going to let that happen. So the banker has the right to pay the plumber, and add it to his total.
Likewise the junior bankers have the right to pay off the senior bankers.
Now, if the senior loan is not in default in any way you cannot change the terms of the deal between them and the owner. In other words you cannot pay off a 6% first and raise it to the rate of your 12% second. After a default and notice and filing the rules change.
Bob Ford is right (in his deleted post) -- your rights as a guy further back in line generally also include the right to cure the default and keep the first mortgage in place.
Hope that is helpful. [ Edited by commercialking on Date 06/09/2004 ]
As to the issue of whether this is a state-by-state issue I do not know of any states in which it works any other way. If you think about it you will see that there are not lots of other ways to organize the matter. This is, in fact, pretty much the way the "secured creditors" portion of the federal bankruptcy code works as well.
The alternative is something like the way the "unsecured creditors" portion of the bankruptcy code works. Rather than standing in line and getting 100 cents on the dollar until there is no money everybody stands in a crowd. All their debts are added up. All the assets are added up. Everybody gets $.40 or whatever on the dollar. But the whole theory of real estate liens for 500 years has been that creditors are secured in the order of their priority.[ Edited by commercialking on Date 06/09/2004 ]
What about if you are say the THIRD lienholder? Can you buy the note (not PAYOFF) to which the FIRST lien is attached?
Does that automatically put you in FIRST postion? Or do you have to pay off the second to get there? In essence you would be buying the FIRST's interest in the property.
Of course I understand that even if you do assume FIRST position, that would only be for the portion from the first lien.
Once that first lien is paid, I assume the second's rights would come before the rights of the THIRD (you).
The key thing in cj's original question was "some senior debt defaults." In the event of a default the senior debt must give notice to all the junior lienholders. Junior lienholders can retire the debt or cure the default and add the costs of doing that to their claim.
Ok, so now there's been a default, you are in third position. The 2nd has not opted to exercise their right to cure. What do you do? If you simply pay off the first and add the balance to your note then you will still be junior to the 2nd. If, instead, you purchase the 1st and step into their shoes you can foreclose on the second (and, by the way on yourself) thereby eliminating the junior debt altogether.
Now technically the first has to let you re-instate and they have to let you pay them off. Its not clear to me that they have to sell their note and let you step into their shoes but I cannot think of any reason they would not do so under the circumstances. Nor can I concieve a judge not granting an motion to make that hapen if the first were reluctant and the 2nd unwilling to pay.
cj,
I don't believe you have the right to buy the sr note. Your protection is that you have filed a recorded Request for Notification of Notice Of Default on the senior so you will be notified if there is a senior default. Your remedy is to bring the senior current and then file a notice of your own on your junior. If the senior is beyond redemption and the full amount is due and payable, then you have the right pay off the senior and again file a NOD on your second (or third).
I think it is very unlikely that you will be able to buy the defaulted senior if it is an institutional loan.
doni49,
If you buy the first, you are in first position by virtue of ownership of the first. If you pay off the first (assuming the redemption period has past), the second becomes the first and your third is now the second and you can foreclose on your note. An alternative is to persuade the second to pay off the first.
Regards,
Ed
This needs to be clarified further: buying the first needs to be as in "paying for it and getting it assigned to you" vs. "paying it off and getting it released". Once a release of a lien is recorded, you're SOL. :(
compwize I did understand your comment.
So we're about 50/50, you must be given the permision to payoff the loan, or your can only bring it current.
I haven't heard from the atty yet.
Here was my situation.
1st in default 393K
2nd in default for 4k
1st is an institutional invest and won't sell.
2nd is private party (bail bond in this case), would love to get 4k and run even thought of offering 5K
property worth 568K
If both notes are in default, and I buy the 2nd, you see why I'm interested in having the right to payoff 1st.
for 397K I would have 1st position in a 568K property.
Now just to foreclose.
Quote:
On 2004-06-08 21:07, cjmazur wrote:
If I am the holder of subordinate debt, and some sr debt defaults. Do I have the contractual right to buy the senior debt and protect my interest?
e.g.
1st 190K
2nd 5K
If I own the 5K lien, and the 190K lien defaults, must I have the chance to buy it?
Absolutely
Quote:
On 2004-06-09 16:15, commercialking wrote:
snip
Ok, so now there's been a default, you are in third position. The 2nd has not opted to exercise their right to cure. What do you do? If you simply pay off the first and add the balance to your note then you will still be junior to the 2nd. If, instead, you purchase the 1st and step into their shoes you can foreclose on the second (and, by the way on yourself) thereby eliminating the junior debt altogether.
I have never heard of a junior lienholder paying off the senior lienholder in the manner that you state. He can't simply add the amount of the senior lien to his junior note. If he pays it off, it is gone (satisfied) and there would be a satisfaction issued. If you go pay off my mortgage you don't have a lien against my property. If you purchase the first instead, then you assume that position. The junior lien holder or anyone else can negotiate to buy the note from the senior lien holder. At that point, he simply steps into that lien holder's position. As he has purchased the note, all of the agreements made in the note remain the same.
Quote:
On 2004-06-09 17:35, edmeyer wrote:
cj,
If the senior is beyond redemption and the full amount is due and payable, then you have the right pay off the senior and again file a NOD on your second (or third).
That is not correct. You do not have to pay off the senior note. You simply purchase it and continue with the foreclosure in the senior's position.
Quote:
I think it is very unlikely that you will be able to buy the defaulted senior if it is an institutional loan.
And why would you think that. The institution is not in the business of owning real estate. They will be more than happy to sell their non-performing notes, and quite possibly at a discount.
Quote:
If you buy the first, you are in first position by virtue of ownership of the first. If you pay off the first (assuming the redemption period has past), the second becomes the first and your third is now the second and you can foreclose on your note. An alternative is to persuade the second to pay off the first.
Now you're back on track.
Quote:
On 2004-06-09 18:27, cjmazur wrote:
Here was my situation.
1st in default 393K
2nd in default for 4k
1st is an institutional invest and won't sell.
2nd is private party (bail bond in this case), would love to get 4k and run even thought of offering 5K
property worth 568K
If both notes are in default, and I buy the 2nd, you see why I'm interested in having the right to payoff 1st.
for 397K I would have 1st position in a 568K property.
Now just to foreclose.
And what benifit do you think a foreclosure will bring you? It isn't like you will get the property for your $397K investment. You will simply bid right along with the vultures on the courthouse steps. I will however agree that your odds of collecting your $397K are good.
That is not correct. You do not have to pay off the senior note. You simply purchase it and continue with the foreclosure in the senior's position.
What is the difference in your mind btwn paying off and buying the senior note.
I think it is very unlikely that you will be able to buy the defaulted senior if it is an institutional loan.
And why would you think that. The institution is not in the business of owning real estate. They will be more than happy to sell their non-performing notes, and quite possibly at a discount.
Personal experience. I have never spoken to a person of authority at a major lender other than WAMU commercial property.
Whereas w/ HML, or private lender, 96% of the time, I'll get a yes we're interested.
As for why I want to do this, a buddy has a technique for having a bidding "advantage" at the auction, which would allow me to get the house.
Also, if the sub-debt is HM, then I'm getting 12% on my money even if I don't win the auction.
Cj,
who have you talked to at the first mortgage/iinstitutional lender who turned you down?
My guess is that once they file suit the attny represtenting them will make it possible for you to buy the mortgage because otherwise you will make a stink filing extraneous motions, etc.
Is the bail bond recorded? Have you filed and recorded the "Request for Notification of Notice Of Default" that edmeyer talks of? (good idea, don't think this is common practice here but its now in my toolbox). You want to make sure you are in the chain of ownership on the public record.
Sounds like a good deal to me. Once the first gets to court I'd push hard to buy the position. Try to get a discount, even if only a small one, to make it worth your time in case the owner gets his act together and re-instates. Once you have both notes its time to turn up the heat on the owner to quit-claim to you and move on with his life so that you're not "simply bid[ing] right along with the vultures on the courthouse steps. "
Good luck.
Mark
who have you talked to at the first mortgage/iinstitutional lender who turned you down?
Countrywide
bofa
MERS - Mortgage Electronic Registration System
WAMU
etc.
My guess is that once they file suit the attny represtenting them will make it possible for you to buy the mortgage because otherwise you will make a stink filing extraneous motions, etc.
non-judicial foreclosure in CA
Is the bail bond recorded? Have you filed and recorded the "Request for Notification of Notice Of Default" that edmeyer talks of? (good idea, don't think this is common practice here but its now in my toolbox). You want to make sure you are in the chain of ownership on the public record.
Before I bought the bail bond, I wanted to make sure this techniqe would work.
Sounds like a good deal to me. Once the first gets to court I'd push hard to buy the position. Try to get a discount, even if only a small one, to make it worth your time in case the owner gets his act together and re-instates. Once you have both notes its time to turn up the heat on the owner to quit-claim to you and move on with his life so that you're not "simply bid[ing] right along with the vultures on the courthouse steps. "
Good luck.
Mark
I think the objective is to be the one that forecloses.
Buy the 2nd, bring the first current, file a NOD for the second and foreclose. Your proceedings will finish before the 1st can restart and complete the foreclosure. You can always make another payment ot the 1st to keep it current, etc.
Once you have foreclosed you have the property and you have financing already in place (the 1st). You have the legal right to take over the 1st as you were only doing so to protect you 2nd.
John
Quote:
On 2004-06-09 18:27, cjmazur wrote:
Here was my situation.
1st in default 393K
2nd in default for 4k
1st is an institutional invest and won't sell.
2nd is private party (bail bond in this case), would love to get 4k and run even thought of offering 5K
Now just to foreclose.
[addsig]
There are a several differences as I see it.
If I incurr significant costs in order to persue the foreclosure, these get added to my recovery if it is sold.
If it isn't sold, due to the nature of the property, visibility or other factors, I get it cheap.
If the borrower, stalls in bk, I get the interest on the note which in the case I cited was 10% (better than any CD).
Even if there isn't a delay, I get the interest on the note for the period of time I hold it.
A commercial property I'm currently working, has a ltv of 57%, pays 12% face on the note, it protected from BK (he already filed, and still has to pay the secured creditor. It's due in 11/04, so I don't have to wait long either,
This part amazes me, there's a PG from the borrower. A quick name search in just this county returned some very interesting properties he owns.
Quote:
On 2004-06-10 03:25, cjmazur wrote:
That is not correct. You do not have to pay off the senior note. You simply purchase it and continue with the foreclosure in the senior's position.
What is the difference in your mind btwn paying off and buying the senior note.
I assume your question was directed to me. The difference is quite simple. If I pay off the senior note on your home, it ceases to exist. Once it ceases to exist, I have no legal recourse to force you to reimburse me for the money I expended to pay off the senior note.
On the other hand, if I purchase the note from the current owner of the note, the note remains as a senior lien and I have the leverage to force you to pay as agreed in the note, or face foreclosure. This is all accomplished with nothing more than an assignment of the mortgage.
In California along with the fruits and nuts we also have some very interesting foreclosure rules. For example you may if you are a mind abandon your Trustee type foreclosure and go for a Judicial Foreclosure. The advantages? Only to an attorney or when a title is really strange.
In the present instant. Bring the first trust deed up to date and maintain it so for awhile. Begin a foreclosure of the second which securing a bail bond is probably available at discount. This you foreclose. I suggest you substitute in a Trustee that you trust and like and is truly in your employee. Push the sale. After sale you can refinance or sell or whatever.
Remember a Request for Notice is purely voluntairly. Of course any Trustee worth his salt will send a notice to all entitled on the title trail. But, sometimes in the interest of some future profit, they miss and send no notice.
I do this a lot and this is the procedure I use. You are not supposed to be able to pay off the prior note. Just keep it current. I am sure the bank if there is a good value will not sell at a discount. Unless it is Bank of America all their meins seem to work on an SOP only. Very strange.
Go for it, enjoy it and get rich. I love to advise rich people.
Cheers Lucius
The benefit and the "hope" that I have on getting the property or at lest by $$ back, if the delays and additionals cost that might be incurred by doing all this.
Now the note might have a 501k opening bid.
GeneralSnafu said "He can't simply add the amount of the senior lien to his junior note."
I understood you could do this under the "right to cure" clause of the note.
The clause I have seen says something like beneficiary has the right to advance any such sums that... blah blah blah.
- 2nd brings 1st current.
- 2nd then starts foreclosure on owner.
- 2nd works with owner to take back the house rather then complete foreclosure. Owner effectively sells house to 2nd lender for some minor amount. Saves owner's credit, legal costs, etc.
- 2nd now owns property and has financing already in place.
Lender in 1st can not claim DOS as there was no sale. Lenders recognize that they need the right to take the title and assume any existing finance as part of the process for protecting a loan.
Any complaints?
Any improvements?
John
[addsig]