Home Loans and Support

Preventing Junior Lienholders from Forcing Foreclosure

Discussion in 'Deed in Lieu of Foreclosure - Do You Need Help to ' started by dealingwithHomeEq, Mar 26, 2009.

  1. dealingwithHomeEq

    dealingwithHomeEq Fighting Homeowner

    I wanted to get this question out there while I do my own research on it. Maybe someone (esp. the Professor) knows the answer.

    Is there any statute or case in California that prevents a sold-out second (junior) lienholder from forcing a foreclosure sale? I'm wondering if any sold-out seconds (perhaps bottom-feeder collection agencies who purchased the toxic debt) have resorted to threatening foreclosure in order to extort some monthly payment on the second. Granted, they wouldn't get anything out of the sale, but is there anything preventing them from trying this tactic?

    Moreover, couldn't they also use this as a weapon on the first as well? In other words, if the first refuses to share some of the payment with the second, the second could force a foreclosure and the first would end up having to take a huge loss (presuming the house is substantially under water on the first too)?

    I found the statement below on a blog and apparently this Certified Mortgage Planning Specialist believes that legislation is needed to prevent such an act; although, I don't know if I would go so far as to agree that it could be a threat to national security. It does pose an interesting issue though.

    Preventing Junior lien holders from forcing forclosure
    Submitted by lbelland from CA on Fri, 02/13/2009 - 11:33am.

    Legislation needs to be passed barring junior lien holders from forcing foreclosure when the value of the subject property is less than what is owed to the senior lien holder. I want to emphasize that passing legislation barring a junior lien holder’s ability to force a foreclosure would not eliminate any of the subsequent remedies they already have by law. Because a foreclosure may wipe out a junior lien, it does not wipe out the junior lien holder’s rights to a deficiency judgment, in those states and circumstances that allow deficiency judgments. Consequently, if the foreclosure process has been started and it could be proved by a certified appraisal that the senior lien holder is accepting less than the principal balance owed, or the production of a certified payoff demand letter from the senior indicating the “net†they are to receive is below the principal balance, then any junior lien should not have the right to bar the foreclosure. It makes absolutely no sense to allow that to happen.

    The junior position that investors took over the past 5 years, and to which Wall Street made very appealing and lucrative, was based on the assumption that appreciation would continue indefinitely. Most of the loans originated then were based on 100% financing in the form of an 80% 1st trust deed, and a 20% 2nd trust deed. Although perpetual appreciation was a naïve assumption it nevertheless brought in hundreds of billions of dollars from a global investment pool wanting to take part in the profits that the 2nd trust deeds promised. Based on the global credit crisis we are now experiencing I feel it would be reasonable to assume that there were no restrictions or investigation as to who those global investors ultimately were; and who are now making the decisions as to what they’ll accept as a payoff in our declining housing market.

    For the most part lenders in the United States are servicers of loans; not holders of loans. Fannie Mae and Freddie Mac hold 56% of the nation’s loans and the balance are spread out throughout the world. The loans that Fannie/Freddie doesn’t own are the ones that are causing the problems in our neighborhoods. If you are an investment company in Singapore managing $20B in funds for Iran, and that money was invested in U.S. mortgage pools, would you have an interest in forcing the foreclosure if your investment has been reduced to zero? Could there be some benefit to a hostile government to force the foreclosure since their investment is being wiped out anyway?

    Since 9/11 there can be no doubt that there are brain pools that exist that are working incessantly to undermine the United States. Who would have imagined the thought and engineering that went into the World Trade Center attack? Where they knew that flying those jets into those parts of the buildings would heat the superstructure to the point that it couldn’t support the weight above it and cause the whole building to collapse like an accordion while our fire fighters are running up to help those in the building get out? The thought devoted to that attack is almost beyond comprehension.

    With that in mind would it be such a stretch of the imagination to think that what’s happening now, in every neighborhood in America, could be part of a contrived and insidious plan by a foreign country, hostile to America’s best interests, that would want to take advantage of a once in a generation global financial crisis to strike our country at the neighborhood level simply by saying “No.�

    It’s not just one lender that’s denying the amounts offered by the senior lien holders; they’re all doing it and inconsistently. The inconsistency can be attributed to the distribution of the loans across the hundreds of mortgage backed investment pools that were sold. We had a negotiator from Wells Fargo apologizing to us, knowing that what was being offered to the investor holding the junior lien made perfect sense but “They’re being so unreasonable.†…she was distraught. WAMU has been one of the worst offenders; but then they were one of the biggest originators of those types of loans. What kind of a savvy investor would prefer nothing over something? It doesn’t make sense unless there’s some perverse kind of “greater good†the investor is considering.

    I pioneered the “Short sale†niche of the real estate industry 20 years ago and a junior lien holder every now and then would force the foreclosure, usually out of spite, thinking that they would have their rights preserved after foreclosure to pursue a deficiency judgment for the whole amount, and they would let the $1,000 to $5,000 being offered go for now. However, in California, and 12 other states deficiency judgments are not allowed for purchase money loans on owner occupied properties. So the money offered wasn’t so bad and was certainly better than nothing. Keep in mind that in 37 other states the investor could accept the offer and still have the right to pursue the deficiency. That’s why forcing the foreclosure doesn’t make sense to me; it defies logic.

    Maybe I’m wrong; maybe the people who invested billions upon billions of dollars are just a bunch of dingbats that really don’t know what they’re doing. Whether they do or they don’t we’re one small shop, multiply what we’re experiencing by the tens of thousands of short sales out there, and you can see the size of the problem, and the locked up capital it represents. If just half of the “toxic†loans were cured by way of a short sale would we need the initial $750 billion dollar bailout, or the trillion dollar bailout in the making?

    Regardless of who’s pulling the strings or why, passing legislation barring junior lien holders from preventing a short sale and forcing a foreclosure would be wildly beneficial to the heart of America. It would keep homes occupied, free up capital, curb the slide in property values and it wouldn’t cost the taxpayers, or anyone else, a dime. Considering the plight our country is now in there’s just no downside to that type of legislation.


    Lawrence Belland, CMPS

    Bernadette & Belland L.L.C.

    "Brokering Fine Homes & Estates Since 1978"

    25283 Cabot Road, Suite 226 - Laguna Hills, CA. 92653

    Office: (949) 360-SOLD (7653) Fax: (949) 275-7508 Email: lbelland@gmail.com Website: RE & Homes 4 Sale: South Orange County!! Full Web Search of All MLS Listings!
  2. ProfessorShays

    ProfessorShays LoanSafe Member

    Let me see if I can explain the question you are asking by way of a hypothetical example.

    In August of 2005, Ima Borrower purchased BlackAcre, a beautiful California home in La Jolla, with a beautiful view of the Cove. She paid $3,000,000 for the home, obtaining an 80% interest only conventional loan from First Bank. She obtained a "HELOC" loan from Second Bank for 20% of the sales price allowing her to 100% finance the purchase.

    Unfortunately for Ima, home values in La Jolla have declined so that the subject home is now worth only 60% of its original purchase price (bring its current fair market value down to $1,800,000). Since the first loan's current balance is $2,100,000, the second loan is from a practical standpoint "unsecured."

    As you might expect, Ima is weighing her options relative to the idea of either renegotiating with her lenders or choosing to walk because of the non-recourse nature of these loans. In conjunction with this thought process she stopped making payments on the first loan and the second loan 4 months ago. First Bank has been negotiating with her and has proposed reducing her interest rate to 2%, effectively reducing the loan balance to $1,800,000 (for interest calculation), placing the additional $300,000 at the tail end of the loan so it won't draw interest but will need to be paid back when the home is sold. Ima appears willing to take this deal because it has brought her house payment down to where she can afford it. However she won't have the income to make payments on the second, but figures there is nothing they can do since their debt is "non-recourse."

    Advancing time to March 2010, Ima has been able to make her monthly payments to First Bank, secure with the fact that she can afford to live in her home. That feeling abruptly ends with her receipt of a certified letter from Second Bank containing a copy of a recorded notice of default. Three months later another certified letter arrives, containing a copy of the notice of sale, scheduling the foreclosure sale for July 25th. Ima attempts to negotiate with Second Bank, explaining that First Bank is owed more than the property is worth and she isn't liable to them for the second loan because of its non-recourse nature.

    Second Bank's foreclosure officer explains that she is correct, but Second Bank doesn't feel it is right for her to continue to live in the home without paying on her loan to Second Bank and figures they will simply foreclose and evict her from the home so she loses it. However, to settle matters, the foreclosure officer agrees to postpone the foreclosure sale predicated upon her making regular monthly payments on the second loan from that point forward. Once again, Ima faces a difficult decision. Either she starts making payments on the second loan (something she can barely afford to do), or face loss of ownership and eviction.

    The problem with suggesting these hypotheticals is I'm reasonably sure we have lurkers from the loan servicing side frequent this site. My guess is our discussions provide them with ideas on how to be better collectors.

    DealingwithHomeEq asks a series of questions. Let me see if I can provide what I think the answers are:

    Is there any statute or case in California that prevents a sold-out second (junior) lienholder from forcing a foreclosure sale?
    Nothing here that I'm aware of. The only legal defensive measure I can see to the second lienholder's action is filing a Chapter 13 and attempt lien stripping.

    I'm wondering if any sold-out seconds (perhaps bottom-feeder collection agencies who purchased the toxic debt) have resorted to threatening foreclosure in order to extort some monthly payment on the second. Granted, they wouldn't get anything out of the sale, but is there anything preventing them from trying this tactic?
    Except as identified above, I do not see anything preventing them taking this action. As a matter of fact its threat may be a good way for second lenders to recover something where the loan is non-recourse.

    Moreover, couldn't they also use this as a weapon on the first as well?
    Yes, effectively forcing participation by the first lender in reaching a payout solution for the second.

    In other words, if the first refuses to share some of the payment with the second, the second could force a foreclosure and the first would end up having to take a huge loss (presuming the house is substantially under water on the first too)?
    Wow, there are a lot of holders of these "non-recourse" seconds that would love to start implementing this strategy. Heck, what do they have to lose? This discussion should serve as a warning to both borrowers and first lenders where the two of them work towards a solution, unconcerned about what the second lender might do.

  3. dogatemy

    dogatemy LoanSafe Member

    I plan to have this debate with my first and second in the next 45 days. I suspect I will fail miserably. My plan includes a carrot and a stick. The stick is the 1st's decision to foreclose on a house worth 40% of the loan which would lead to a roughly $100k loss on a $125k non-recourse loan. The carrot is the interest the 1st could make by giving a principal reduction then refinancing the first and second into a 30 year fix. If the lender agreed then everyone would walk away profitable.

    Of course lenders and investors are usually too greedy and short sighted to consider the ramifications of their decisions. I still have hope. ;)
  4. dealingwithHomeEq

    dealingwithHomeEq Fighting Homeowner

    Thanks for the quick and very detailed answer, Professor.

    So, I wonder if the legislature in California is even considering the floodgates that will open once these sold-out seconds realize that they hold more negotiating currency with the threat to foreclose rather than suing an insolvent (and probably judgment-proof) debtor directly on the note. Or, maybe this is already common practice. Talk about sitting on a house of dynamite.

    If this went on in court, maybe such a spiteful maneuver could be considered an abuse of process because everyone loses if a sold-out second forces a foreclosure. But, the courts are completely out of the loop on a trustee sale; so, I guess they have a right to pursue their remedy--even if it does result in no recovery.

    Do you know of this happening to anyone?
  5. ProfessorShays

    ProfessorShays LoanSafe Member

    No I do not. Remember this is the first time that we have a down market where you had this 80/20 loan arrangement (effective 100% financing). My sense is the equities of the situation are not all that great in terms of favoring the borrower when you look at the situation. Remember after all that the borrower did promise to repay the debt. If the borrower had come to you as a "friend" and asked you for the 20% loan, how would you feel about not getting your monthly payments (with no prospect of seeing a dime of either your principal and interest), while the borrower continued to live in their home, making a reduced monthly payment to the holder of the first loan?

  6. dealingwithHomeEq

    dealingwithHomeEq Fighting Homeowner

    We are living in a unique period. Just about everything the analysts and economists have predicted has turned out to be incorrect. I suspect that most of the seconds in California are sold-out. If I find any information on this subject, I will definitely share it.

    By the way, all that talk about BlackAcre is probably going to give me nightmares now about the Rule Against Perpetuities or the fee simple defeasible, subject to a condition subsequent.
  7. baileys dad

    baileys dad LoanSafe Member

    By the way, all that talk about BlackAcre is probably going to give me nightmares now about the Rule Against Perpetuities or the fee simple defeasible, subject to a condition subsequent.

    Dealing or Prof: could you please repeat the above phrase in simple english?
  8. baileys dad

    baileys dad LoanSafe Member

    Another question: in the Prof's example, it has gone beyond the threat of foreclosure; the second is actually doing it. So does the second have to pay off the first (2.1M) in order to get it's share (600,000)? I can believe the threat, but are you saying that the second would end up paying 1.5 million and still potentially end up with nothing?
    Please let me know what I am missing...
  9. baileys dad

    baileys dad LoanSafe Member

    Lastly, am I missing the math?

    3,000,000 purchase price
    80% of 3,000,000= 2,400,000
    20% of 3,000,000= 600,000

    so 4 years after paying interest only and the principal has dropped to 2,100,00?? Please explain...
  10. ProfessorShays

    ProfessorShays LoanSafe Member

    Oops. Yes, 80% of $3,000,000 is $2,400,000. Guess that makes my analysis worse, raising the "placing the additional $300,000" to "placing the additional $600,000..."

    The result of course doesn't change. At the foreclosure sale, let's say there are no bidders and the second lender bids a $1.00. They now own the property and could approach the holder of the first loan, suggesting that it is in both of their interests to have second lender evict the tenant, put the property immediately on the market, dispose of it at market price, and reach a fair resolution on the distribution of sales proceeds (with the second lender receiving a nominal amount but even a nominal amount is better than nothing).

  11. ProfessorShays

    ProfessorShays LoanSafe Member


    I actually enjoyed studying the "Rule Against Perpetuities." But then that is probably evidence of how intellectually sick I am.

  12. baileys dad

    baileys dad LoanSafe Member

    Sorry Professor, still don't understand. It seems by doing this they are able to reverse the precedence of the order of liens...I thought the first had to be satisfied first, before changing title...
  13. baileys dad

    baileys dad LoanSafe Member

    Now I figured out was bothering me. We are talking about a very desirable property, whose value is @ 2,000,000. At the auction, the second can only ask for what's do them, 600,000. Thus, you will most likely have bidders in excess of the asking price and for the second lender to follow through on their plan, they would have to most likely bid in excess of their asking price.
    An educated real estate person might pay 1 million for a property worth 2 million in a very nice neighborhood, right?
  14. ProfessorShays

    ProfessorShays LoanSafe Member

    We both agree that the second lender's position, seeing that its debt has "non-recourse" status, and is out in "never, never land" in terms of security, isn't good. Now the second lender could wait a long, long time and eventually it might get something if the property value exceeds the amount owed on the first. Is that going to happen anytime soon? No. So how much do you think the second lender would get, out on the secondary market, if it attempted to sell its $600,000 debt? Not much. So, a smart guy like you says to them, "how about I use a creative way to collect some money on it that will be greater than you are getting now," and you and the lender agree that for your fee you will get 50% of what you get the borrower to pay.

    So the lender assigns the note to you, and being the "junkyard dog" of a collector you are, you approach Ima with a "start paying or you lose the house because I'm going to foreclose speech." My guess is Ima is either going to fold completely and walk or agree to negotiated terms on an affordable repayment schedule that begins immediately. Do a hundred of these deals and you've got yourself a pretty good stream of money flowing in.

    Me, I'm a reformed debt collector and personally don't have the heart (or monetary need) to do this sort of legal arm twisting. But my guess is there are a lot of former mortgage brokers out there who do.


    P.S. I'm using the "you" and "'junkyard dog' collector" as one in the same. I know you are not that way and I probably should have used Bernie Madoff, but since he is in jail I figured it wouldn't be as realistic.
  15. baileys dad

    baileys dad LoanSafe Member

    So if Ima calls the bluff, then junkyard collector is up a creek?
  16. ProfessorShays

    ProfessorShays LoanSafe Member

    Baileysdad said, "Now I figured out was bothering me. We are talking about a very desirable property, whose value is @ 2,000,000. At the auction, the second can only ask for what's do them, 600,000. Thus, you will most likely have bidders in excess of the asking price and for the second lender to follow through on their plan, they would have to most likely bid in excess of their asking price. An educated real estate person might pay 1 million for a property worth 2 million in a very nice neighborhood, right?"

    The short answer is NO. Who in their right mind would buy a property at the foreclosure sale where the property is only worth $1,800,000 and the post foreclosure loan amount is $2,400,000? The answer of course is no one. And that's just the point here. The only one to buy will be the second lender (or their "junkyard dog" collector who they have assigned the loan to).

    Putting on your "Junkyard dog" hat, you don't want to foreclose. But it needs to be a real threat and it is because if Ima doesn't want "pay to play," you simply foreclose and contact the first lender to see if they are willing to pay something for a cooperative sale of the property. Given we see them do this all the time for short sales where they agree to a nominal payment to the holder of the second loan, they will undoubtedly agree to paying something since if they don't they have to start their own foreclosure process and get nothing during the foreclosure period.

  17. dealingwithHomeEq

    dealingwithHomeEq Fighting Homeowner

    These banks deserve to fail. I can't believe the current administration met with their CEO's today to placate them and beg for help. Roubini and Krugman are right--nationalization is an eventuality no matter what they do.

    Long delays frustrate home short-sellers: Option for avoiding foreclosure comes with risks East Valley Tribune (Mesa, Arizona) March 4, 2009 Wednesday

    Copyright 2009 East Valley Tribune
    East Valley Tribune (Mesa, Arizona)

    Distributed by McClatchy-Tribune Business News

    March 4, 2009 Wednesday


    ACC-NO: 20090304-MZ-Long-delays-frustrate-home-short-sellers-0304

    BYLINE: Edward Gately, The Tribune, Mesa, Ariz.


    Mar. 4--Chandler-based realtor Zack Alawi had put together what he thought was the perfect short sale in Queen Creek.

    The homeowner was desperate to avoid foreclosure, and a family had fallen in love with the home and made an offer. The home was valued by primary lender Wells Fargo at $220,000, and the offer was for $230,000, Alawi said.

    In a short sale, the homeowner sells the mortgaged property for less than the outstanding balance of the loan and turns over the proceeds to the lender(s), usually in full satisfaction of the debt.

    In this case, the debt was split between two mortgages. Wells Fargo was the first lien holder with the highest percentage of the debt, and Bank of America was the second lien holder with a much smaller percentage.

    "Bank of America basically said, 'You know what? We want 10 percent (of the offer) or nothing,' " Alawi said. "If the home goes to foreclosure, they're going to get nothing because they're in second position."

    Wells Fargo refused to give Bank of America 10 percent and instead proposed $5,000, he said.

    "Bank of America held (its) position, and I escalated all the way up to the vice president level ... and finally the gentleman was kind of enough to say this is kind of ridiculous," Alawi said. "So, I went back to Wells Fargo and said I got the vice president at Bank of America telling me he'll take less than 10 percent and we can negotiate that, but by this time Wells Fargo had it. They were like, 'You know what? We want to stick it to Bank of America . .. we're going to foreclose on this house. Short sale denied.' "

    Caught in the middle of the tug of war were the homeowners, who now are facing foreclosure and a devastated credit record, and the buyers, who made an offer and waited for nothing, he said.

    "It's not in Wells Fargo 's best interest because I can guarantee you that house that was valued at $220,000 is going to go on the market three months from now, and they're probably going to end up selling it for $180,000 when they could have had $230,000," Alawi said.

    Realtors across the East Valley are fed up with banks derailing short sales by either squabbling among lien holders or dragging their feet. Marleigh Manzo, a realtor in Chandler, said she's tired of seeing people lose their homes to foreclosure strictly because the banks take too long in considering short-sale proposals.

    "The banks, if they were my kids, I'd ground them because they just messed up my seller," she said.

    Those involved in short sales need to understand it is an extended process because there are many complicating factors, especially when there is more than one lender involved, said Rick Simon, Bank of America / Countrywide spokesman.

    "There's no doubt it's a slow process right now," he said. "It's the nature of the volume and the amount of time that is being spent on offers that really are not going to have a reasonable chance of being accepted."

    Many homeowners and potential buyers won't speak publicly about their short-sale experiences because they're afraid of retaliation from banks. Sellers also fear embarrassment in their neighborhoods, Alawi said.


    After submitting a short-sale proposal, Tammy Knight, a realtor with Century 21 Towne & Country in Mesa, begins calling the lenders to make sure they received the proposal and have started a third-party evaluation of the property.

    "I sit on the phone hours at a time waiting to talk to asset managers, negotiators, and it's just constant runaround," she said. "In the last six months, I've had probably six that went to foreclosure because the banks were not corresponding with me, or ... they would just completely reject them."

    Darlin Gutteridge, a realtor at Model Home Center, which has locations inside malls throughout the East Valley, said many buyers get tired of waiting for banks to make a decision, and walk away.

    "I've got a (short-sale proposal) with CitiMortgage, and it took five and a half months to get them to give us an answer," she said.

    Some offers made by first lien holders to second lien holders seem intended to fail, Manzo said. "I had an example where the first bank offered the second bank $1,000 on a $90,000 second mortgage," she said. "Well, would you be happy with $1,000? So that causes its own delay."

    More banks are passing mortgages to servicing companies, and in some cases that has quickened the pace of approval, Knight said. These companies service the daily maintenance of a mortgage loan.

    "Their role is to service the loan and see what we can do, and if the inevitable is either short sale or foreclosure, they seem to be at least open to the short sale much better," she said.


    Short sales can be a worthwhile option for some customers, but they take time to complete, according to a statement from Wells Fargo. This "complicated transaction requires paperwork from the customer, home valuations, approval from the mortgage servicer and mortgage insurer if applicable," it said.

    In addition, approvals are required from the loan investor and potential coordination with the second lien holder, according to the bank. It may take additional time for the first and second mortgage holders to come to agreement.

    Short sales are going to move slower than traditional home sales for a variety of reasons, said Bank of America /Countrywide's Simon.

    "The offer is going to need to be relatively in line with the current market value, not speculating on where prices are going to go from here on out," he said. "And obviously in any transaction the buyer has to demonstrate the ability to come up with sufficient funds, which is more challenging today than it was a year and a half or two years ago."

    Also, the investor that holds the mortgage has to approve the short sale, and it can take time to get investors to consider short-sale proposals, Simon said. Loan servicers do not have the authority to approve a short-sale offer, he said. "The seller and the buyer, and the real estate agent, have some responsibilities as well, and they do not always take them very seriously," he said. "They need to respond in a very timely fashion to any requests for information and documentation."

    JP Morgan Chase is adding resources and ramping up efforts to consider short-sale proposals in a more timely manner, said Mary Jane Rogers, local spokeswoman.

    "We are definitely in an unprecedented volume level," she said. "We appreciate the interest of the homeowner and the realtor to expedite a resolution and we are ... trying our best to work through a backlog. The challenge is these are individual negotiations, but we are stepping up our efforts every week and every month."

    A lot of lenders simply haven't ramped up to accommodate demand for loan modification and short sales, said Jay Butler, director of Arizona State University's Realty Studies Department.

    "There's a growing sense of frustration over the whole process because you're really trying to negotiate in a very reasonable period of time a lot of serious issues, and the problem is values keep dropping and it's hard to find out that final point," he said.

    CONTACT WRITER: (480) 898-6814

    or egately@evtrib.com

    Short sale

    Short sale may be an option if a homeowner owes more than their home is worth, and they don't want to declare bankruptcy or face foreclosure.

    The basics of short sale

    1. Once an offer on the home is made, a realtor compiles a proposal that includes documents outlining the homeowners' financial status, the offer on the table, the financial viability and credit worthiness of the potential buyer, and other considerations.

    2. The proposal is submitted to all lien holders on the home, including those who hold first and second mortgages.

    3. All lien holders (investors) must agree on the offer, and the amount each will receive is negotiable.

    To see more of The Tribune, or to subscribe to the newspaper, go to Arizona local news - Chandler, Gilbert, Mesa, Queen Creek, Phoenix, Scottsdale | eastvalleytribune.com | eastvalleytribune.com. Copyright (c) 2009, The Tribune, Mesa, Ariz. Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.

    LOAD-DATE: March 5, 2009
  18. ProfessorShays

    ProfessorShays LoanSafe Member

    Baileys dad asked:

    'By the way, all that talk about BlackAcre is probably going to give me nightmares now about the Rule Against Perpetuities or the fee simple defeasible, subject to a condition subsequent.'

    Dealing or Prof: could you please repeat the above phrase in simple english?

    I decided to wait until this weekend to provide an adequate answer to the question you posted because it would take time for formulate a meaningful response. Problem is the only meaningful response I can think of is that the "rules against perpetuities" are simply a method of learning torture law professors burden their students with in their real property class. These rules have their roots in English common law and have little application in today's environment but in a vague sort of way are designed to prevent having real property ownership stay within the family for generation after generation. I guess what I'm saying is they are not worth worrying about.

  19. baileys dad

    baileys dad LoanSafe Member

    Prof Shays, thanks....going back to Blackacres example one more time, please.

    Assumed: that the second lender is entirely unsecured. Non-recourse state, both loans are purchase money only.
    Will use general scenarios to help clarify...

    1)Foreclosure By First Lender: House is sold and proceeds go entirely to the first lender. There is no money after satisfying first lender for the second lender. The first lender is "First in time, first in line"
    Second Lender gets nothing and has no leverage whatsoever.

    2) Short sale: In order for the short sale to go through, the second must agree to the terms. In thread 17 above, the sale could not go through without the second signing off and so they had some limited leverage.

    Second lender COULD have gotten some money, but ended up with nothing.
    The second lender is "Second in time, second in line"

    3) Foreclosure by Second Lender. While the first lender is being paid monthly by Ima, the second forecloses because they haven't been paid forever. Second lender now owns the house, which in our example, is worth 1,800,000. But they cannot due anything with the house, because there is a lien (first mortgage) on the property for 2,400,000. So they make some sort of deal with the first lender and end up with some undetermined amount of money.

    Is this right so far?
  20. baileys dad

    baileys dad LoanSafe Member

    Your and DealingWith's original example may be way beyond my comprehension, but I am trying to understand.

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