Home Loans and Support

Sold Out Junior Loans

Discussion in 'Debt Settlement' started by TomEason, May 14, 2011.

  1. TomEason

    TomEason LoanSafe Guide Staff Member

    Sold Out Junior Loans
    This thread has been started due to some confusion about the difference between a 2nd or 3rd or other junior loan, and a “sold-out junior” loan. This occasional confusion has been noted on the “Strategy for Settling Your 2nd” thread.

    Here’s the difference between the two:

    A) A 2nd (or 3rd, etc) is a secured junior loan on a property that has not been foreclosed, i.e. one to which the homeowner still has title. In almost every instance, there is a compelling reason to eventually settle with the 2nd lender. Why? To extinguish (re-convey) the 2nd lien that encumbers the property. In certain rare instances, that need to eventually extinguish the lien may not exist. What are those instances?

    1) When the 2nd loan is so underwater that it will take many, many years for the property value to recover enough to put that 2nd clearly in the money. This long time horizon might be longer than the homeowner’s life expectancy.

    2) The homeowner intends to live in the property for the rest of his/her life. A corollary to #1 above.

    3) The homeowner doesn’t plan to ever sell or re-finance the property.

    4) The property owner doesn’t have plans to leave the property to heirs.

    5) The homeowner just doesn’t care about it.

    B) A sold out junior loan, on the other hand, is a formerly secured junior loan, like a 2nd which was secured by a property that has already been foreclosed. A foreclosure by the 1st lender has wiped out the 2nd’s security, and that former 2nd is now an unsecured “sold out junior.”

    1) If that sold out junior was a non-recourse loan (a “purchase money loan” in most states), then the sold out junior lender is legally barred from suing the borrower for any money due on the note. The debtor is protected and has no legal risk.

    2) If, however, that sold out junior loan is a recourse loan, then the sold out junior is not legally barred from suing the debtor for money due on the note.

    But, the good news is that, heretofore, such lawsuits have been very rare, by any lender in any state.

    C) About Settling with a Sold Out Junior

    Due to my last statement in B above, I advise borrowers never settle with a sold out junior lender. There are occasional rare exceptions. For instance, a borrower whose employment is conditioned on maintaining a security clearance, which might entail periodic credit reports and background investigations, may want to settle to avoid the risk of losing his/her job.

    Occasionally a borrower may feel some moral compunction and want to do “the right thing.” Those borrowers are few and far between, particularly after they learn that their credit file will likely still have a derog reported, despite a settlement.

    Finally, settling with a sold out junior lender is always less of a challenge than settling with a 2nd lender. Why? Because a sold out junior is an unsecured lender, and thus has no leverage, and is quite happy to ever see any more money on that note!

    Here’s an example. Settling a loan is really buying it back from the lender. Since lenders can sell 2nds on the secondary market for no more than 2 – 5 percent of the loan balance, a borrower should expect to settle for between 5 and 10 percent on a secured 2nd, and even less for a sold out junior.
  2. shobam

    shobam LoanSafe Member

    Thanks Tomeason for starting this thread: I would ask all of you out there who are sitting on a sold out junior such as me to keep this thread alive and active. Please log collections tactics and anything that might be helpful to other. I see dealing with a sold out junior not a lot unlike dealing with a 2nd. History seems to be showing that lenders are charging off 2nds within days of a short sale closing or foreclosure. The books are flooded with sold out junior right now is my guess.

    To comment on a fear that some might have about sold out junior sitting on your credit report as a charge off and holding a government job or a position that requires you to posses a clearance, yes it could be a concern but it is not the end of the world. In fact I do work that often requires that I hold a higher level security clearance. I have had secret clearances in the past. Please know that I have investigated this very problem. I would say that if you find yourself with a charge off from a sold out junior or a secured 2nd and you currently hold a clearnace, speak to your Security officer right away. If it is the result of a short sale the situation can be mitigated in that you are dealing with the debt but have not come to terms. show that you are willing to settle or deal with the lender. The DOD or other government agencies know that these things can be a fact of life especially in this economy. The concern to them is that you might be compromised for that debt. So easy their fears. Keep all docs leading up to the short sale or foreclosure and show that you are on track to strighten out your finances. There are sights out there that address this very issue.

    If you are seeking a new clearance you might have problems if your debt to income ratio is too high, you have charge offs and that you show a history of poor debt management. Be up front with your prospective employer or current employer if seeking a higher level clearance or new clearance. One charge off from an unfortunate situation is not a show stopper and that to can be mitigated. Be savy collect all your documents and don't show fear of the situation if you do have to go through an interview with a DOD agent. It has been documented that debt, gambling and drugs are the top reasons why people are flipped so be aware of that.
  3. CA_NA

    CA_NA LoanSafe Member

    We are a military family and husband has informed security of our eminent foreclosure. I suggest military members let their security officer know what is happening.
  4. Screwed11

    Screwed11 LoanSafe Member


    My husband's job (if it becomes permanent) would require frequent credit, driver's license, and criminal background checks. Hence, we're basically out of luck -- even if we do settle with our STB-sold-out-junior, there will, as you point out, still be a derogatory report on our credit reports. So, needless to say, he's kept up job hunting but nothing else has shown up so far.

    The settlement will probably cost us 25K, but we have little choice. BTW, Tom, as part of our negotiations, can we ask our junior lender to not report the loans to the credit bureaus?

    I'm also worried about how debt collectors report your debt. Say my sold out junior loans ended up in the hands of debt collectors. How long can these people report my sold out loans to the credit bureaus as unpaid / delinquent? I am basically confused here because I'm wondering how the SOL ties into credit reporting. I know that in CA, the SOL is 4 years from the date of first missed payment, and, on my silent loans, I'm assuming that it will be 4 years from the date I officially receive a delinquency notice from the agency. So, a debt collector, who may end up purchasing my loans, would technically have 4 years from that date to report us to the bureaus, right? And, this is despite the fact that my loans are non-recourse and they are not legally entitled to a dime?

    Or is there no legal time limit to how long they can report my delinquency and can technically do so for as long as the debt exists (which could even be decades from now)? I am just completely and utterly confused.

    Could you clarify? Thanks in advance.
  5. TomEason

    TomEason LoanSafe Guide Staff Member

    Thanks for your post. In answer to your question "as part of our negotiations, can we ask our junior lender to not report the loans to the credit bureaus?" the answer is yes. You can, and should ask for anything you want in a settlement. It's part of any negotiation; the lender can either acquiesce to your request, or decline. But without your stating that as a settlement condition, it will never be granted voluntarily by your lender.

    In answer to your questions about SOL and credit reporting, they are not really related. Credit reporting is governed by the FCRA. That law states that a creditor/collection agent may report an account delinquent for up to 7.5 years from the date of first delinquency. The account cannot be "re-aged" by having the account transferred from the original creditor to a CA. It's still a max of 7.5 years. The SOL, on the other hand, as you know, limits the time in which the debtor can be sued by your creditor. Since your loans are non-recourse, you are obviously protected anyway under the provisions of Cal CCP Section 580(b). So, in your case, the SOL will prove to be redundant protection (not really needed).

    Just curious why you state the settlement will probably cost $25k and that you have little choice. It seems to me you will have lots of choice, even though your husband's security clearance may be a factor. Good luck to you!
  6. TomEason

    TomEason LoanSafe Guide Staff Member

    Hi shobam
    Thanks for your post and for expanding on the security clearance issue. This is valuable advice.
  7. TomEason

    TomEason LoanSafe Guide Staff Member

    Thanks for your post. This is very good advice because you are out in front of the issue; i.e. although the event hasn't yet occurred, you've warned security that it's coming.
  8. shobam

    shobam LoanSafe Member

    In Essence tomeason's "Strategy for Settling your 2nd" hold here as well. ALSO: All my information is a collection of Lawyers Opinions, articles that I have read or situations that I have experienced here in Massachusetts. Thanks

    In dealing with a collection agency, recovery group for a bank regarding any charge off you must negotiate how your debt will be reported to the CRA after the debt is settled. There is little reason to settle if you are looking to improve your credit standing for some reason if they report it as "Paid Collections". Paid collections is a negative mark against you that is viewed upon very poorly by other lenders I am told. It suggests that you would not have paid if the debt had it been not sent to a CA.I am told that it is the minimum that CA's have to report after the debt is paid and most don't even do that.

    If the CA owns the debt, they can report it as paid in full as agreed and remove all derogs. Any lender can do the same. They will not modify your report to reflect a positive mark if you do not work that into the negotiations. Often they will tell you that they cannot remove the derogs, its pure BS. It must be worked in and put down in writing and signed before any cash is transfered otherwise you will not be able to get them to do it. I have read where by people have not negotiated for a derog removal in writing, but had agreed to it over the phone and the negative mark stayed there. Moreover the web is littered with horror stories and a Lawyer will tell you the same that if you don't get the settlement down in writing and transfer the cash or send them a check before you get it in writing you will likely start getting collection calls all over gain either by that same outfit or another agency looking to get the rest. You will have little to stand on if it is not in writing, also have a professional look at the deal before you sign it and send in the cash. I had a verbale agreement in place with PNC CLC's recovery group for a settlement amount of 6K on a 43K SOJ back in Feb 11, I was waiting for a written confirmation, I have proof that we had a verble agreement. What I got was a call from another collection agency in April. Do you need to know any more

    To me its simple at this point. I have a sold out junior in the hands of a CA. There is a CO on my report. I'm not in dire need to change that. If all that I can get is a "paid Collections" for 5 or 10K to settle a 43K debt then I might as well file a BK7 or BK13 and have that sitting on my report with no other debt.

    Also, these CA's trying to collect on these SOJ use all the same scare tacktics as they would on any other debt. Also know that any good Lawyer will play a bit to your fears regarding the possibility that you could get sued. Go out and look at your laws in your state and ask yourself "is it worth it for the to do it" unless you make a ton, its not. I found it very ironic that many professionals including respected Attorneys that I spoke with during my whole ordeal going back to 2008 all said that you could be sued and have your wages garnished but only one could point to an actual case. The case he pointed to had extenuating circumstances in that it was a HELOC on a house that was no where near underwater and the couple was older and they had lot of other resources.

    Please keep the info coming!!!!!!!
  9. TomEason

    TomEason LoanSafe Guide Staff Member

    Profiling and the Risk of a SOJ Lender Suing
    I have often posted the fact that I have yet to see any evidence of any sold out junior lender in any state suing a borrower on a recourse loan, even where the lender is not legally barred from doing so.

    However, some forum members are still expressing their concerns about this risk. After all, it’s understandable that no one wants to be a victim of the first case. So, I decided to post this short article on that potentiality.

    This article is about “profiling” as pertains to the risks and reasons why sold out junior lenders, here to date, are not suing borrowers for money due on a recourse note.

    Since we cannot know or predict who will be the first to be sued by a SOJ lender, we can best model that risk and possible future occurrence by “profiling.”

    Profiling is what an insurance company does when determining its risk based premiums. An insurance company uses “predictions” by generalizing from past experience. For example, an insurance company might charge a young male driver a higher premium than it would charge a young female driver. This is the case even though some young male drivers are excellent and very safe drivers. Despite the existence of exceptions, the insurance company is forced to “generalize” in setting its premiums.

    The process of moving from the specific to the general is both necessary and perilous. How does one know when he has used the right generalization? It’s difficult to know except via past experience and historical data points.

    As legal scholar Frederick Shauer observed, “Painting with a broad brush is often an inevitable and frequently desirable dimension in our decision-making lives.”

    As I previously stated, nobody wants to be the first “test case” in being sued by a SOJ lender. Typically a test case is used by a litigator for its media effect, i.e., its deterrent effect on American homeowners/borrowers who may be considering a default on a sold out recourse loan. Desirable components of that media and deterrent effect are: the fame, name recognition, and wealth of the defendant, and the dollar amount of the lawsuit.

    This is where profiling comes into play. If the debtor is a small player, having no name recognition, and having limited net worth and assets, he/she doesn’t fit the profile of an early test case.

    Hopefully this article will help allay some members’ concerns.
  10. shobam

    shobam LoanSafe Member

    Tomeason; thanks for useing the insurance analogy. I have been suggesting as much when I say "Is it worth it for a lender to sue". I don't think it is at least up here in Massachusetts for a lender to sue a working person who earns under 100K. That number could higher if you have dependants. The numbers are just not there. The only reason to sue would be to ge a judgement and then sit on it until they can see that your financial situation has improved and then try something else. If you couldn't afford that second in the first place, who is going to sit there with a judgement when you could file. This noise about leining another property is nonsense too, in essence a lein is what led to the SOJ in the first place, why go and lein another underwater house that has a homested.

    Here again, there is no perfect science here. I plan to wiat this out, apply "strategy for settling your 2nd" and work towards the best possible deal for me. I'm not so fearful anymore. BofA, PNC/CLC, CA's and the like have dimished thier roar by roaring so much.
  11. izzle

    izzle LoanSafe Member

    Thanks @Tomeason and @shobam for your thoughts on this topic. I will be here in a couple months with a BOA loan as a sold out junior. I look forward to hearing others experience with this. I will post here as I go through this process.
  12. TomEason

    TomEason LoanSafe Guide Staff Member

    Thanks for your informative post, as usual. Yes, we are generally of the same mind on the subject, as you have in the past suggested "Is it worth it for a lender to sue?" Which coincides with the concept that early "test cases" won't be lawsuits against small players like us, but against media worthy defendant(s). I particularly enjoyed the last phrase in your post, "have dimished thier roar by roaring so much."
  13. TomEason

    TomEason LoanSafe Guide Staff Member

    Thanks for your post. Hopefully your FC experience will be tolerable. We look forward to following your progress.
  14. shobam

    shobam LoanSafe Member

    Thanks for the kind words Tomeason: We are in uncharted territory here. This sight and the expieriances of its bloggers are what will rule the day.

    Please know that I viewed "Strategy for Settling Your 2nd" with a very skeptical eye at first. However; the savy street smarts in me did not permit me to brush it off. The strategy was in direct conflict with what we all told every day, "Work with your creditors". So I did what I always do when confronted with problem, I researched it. When I finally got good information from those who negotiate and deal, nearly every bullet in "Strategy" was confirmed. The point is, some of the best information out there is right here, i have confirmed much of it. Use your filters but read it here.
  15. chazz

    chazz LoanSafe Member


    Hi. Just been reading a few of your posts and decided to register to post and see what you think about my situation. I recently completed a short sale on 11/2010. I have a 90K HELOC that was secured by that house. Both 1st and HELOC were owned by BofA. I stopped paying the 1st and the HELOC around April or May 2009. During that time I received occasional calls from BofA asking if I could pay any amount of what I owed on the HELOC. About a month ago I received another call from BofA stating if I can't make arrangements to settle the amount in full it would go to collections. Last week I received a call from a collection agency. Not thinking much about it I disclosed some information including me and my wife's profession, reason we aren't able to pay (due to loss of wages, cut in work hours), phone number and current house address, and my workplace. Told them I could probably pay $1000, the CA rep said there's no way they can settle for that amount. She said they could possibly settle for $10-12K and that I should think about it for the week, and see if I could come up with that kind of money. She said the first month of collections is the best time to settle. She also stated that I could make payments on it but would have to put a downpayment of 20% or 25%, I can't remember. The week went by and now I've been getting calls from her everyday since, and I haven't picked up the phone :laugh:. I talked with my realtor and he told me to ignore them, change my phone number, and eventually they'll stop calling. He also said that they can't garnish wages since it's now an unsecured loan. I started thinking I should try negotiating with them for a final price of $6-8K just to get it settled and start repairing my credit score, also thought about setting so I don't get sued. Then I've been researching on here and it seems that ignoring them might be best. I'm not sure what my credit report shows but from reading on here it seems like it wouldn't improve by setting with the collection agency. So my question is, did I give too much info? Am I too far involved with the collection agency now to just ignore them?
  16. TomEason

    TomEason LoanSafe Guide Staff Member

    Thanks for your question. Your BOA HELOC is a sold out junior, n'est pas? If not, please correct me. Since they are a SOJ lender, you should forever ignore them. Your credit file has most likely been impacted by a derog report regardless of what you do with this SOJ lender. Again, I recommend you never again communicate with this lender. As far as your concern with being sued, have you read this thread? It addresses that potentiality. Good luck to you.
  17. shobam

    shobam LoanSafe Member

    Hi Chaz and welcome aboard!

    I would like to point out that I am new to this blog and the problems we face here relitive to others. I have made it my business to know the subject to the best that I can. I have spoken with many professionals throught out my whole short sale, closing, deficiencies and now a SOJ. Never throught out my affair did any of my creditors tell me the whole truth nor did I expect to have my HELOC charged off and sent to collections with out the principlas calling me once

    I am attached to a SOJ from E*TRADE serviced via PNC bank's CLC division, we closed back in 9/2010. I got calls from CLC, I had a aettlement in principal sitting there back in 11/2011 waiting for a written confirmation and what I got was the SOJ sent off to a CA. Don't believe anything these people tell you. This BS about the first 20 -25 days is the best time to settle is the bigest line of BS that I have ever heard. She said that to get you on the book for her commision for that month. Read the thread starter here and read "strategy for settling your 2nd". Follow those strategys and if need be tailor them to you needs if you have anything special going on. Never send in financial information to a CA for any reason under any circumstances, never. This includes bank statements, W2s, pay stubs and the likes. This is the first huge NO NO!

    Time is on your side. If you feel the need to settle do so on your terms and in your time. Also, negotiate how your paid SOJ will appear on all three of you CR. A "PAID COLLECTIONS" is just slightly better than not haveing paid it at all. You dod not want a "PAID COLLECTIONS" shiowing on your CR. You want at minimum "Legally Settled for less than owed" at bare minimum. What you really want is to have it sowing paid in full as agreed. Don't believe that they can't change your report, they absolutly can. Also know that under no uncertain terms do you send in a red cent for anything unless or until a settlement plan to your liking is sitting in front of you signed and legal that shows how the debt will read on your credit report and that it in fact paid in full. If you send in any money without a written agreement and terms as to how the paid debt will appear on your CR and that is paid in full, expect them to not report it on your report as agreed and then expect more collection calls to begian shortly after you sent in the money based on a verble agreement. Their is no such thing as a verble agreement in this business.

    About being sued and garnished? I have beat that issue to death. Tomeason, me, etal have said that no one can point to one case here in the USA where by a SOJ is sueing even though they legally can. I found one case that Citi was sueing but it has other circumstances beyond the scope of this subject. Read the garnishment laws on a federal level and then ones that your state has in place. For starters and lender would have to serve you papers, sue you in court, you would answer the summons. Form a defense, i have one in place in the unlikly event it coems to that. Win a judgement and then go back to court to force the judgement. Your first 75% or 30 times the natioal min wage is exempt from garnishment. then the judge can award up to 25% of the remaining If your an hourly earner and can show even a little hardship chances are it is not worth it for anyone to sue you. For example, here in MA. the 1st 85% is exempt or 50x the national min wage what ever is higher. Even if you make 30 per/hr and you have no dependants and can show no hardship of any kind $180.00 per/wk of you wages could be garnished. This whole process takes years. In the end most people file BK.

    So read on, read other information and please keep us posted. I would like to settle at some point too.
  18. izzle

    izzle LoanSafe Member

    When negotiating for how items will appear on your credit report, what are the values that can be reported and what are they in best to worse order?
    Something like,

    Paid as Agrees, ..., ..., Paid Collections, Never Paid
  19. TomEason

    TomEason LoanSafe Guide Staff Member

    I'm not positive, so I won't pretend to know, and possibly give you bad info. I recommend you call one of the major CRAs and ask, or you may find the answer on their websites. Account entries on a credit file are both coded and explained in terms similar to your examples. I'm not positive if all three CRAs use the same exact wording.
  20. shobam

    shobam LoanSafe Member

    I have some expirence here, tomeason is probably has the best sugestion, call one or all the major CRA's and see what they say. However; don't expect to get someone who knows anything or who can speak fluent english on the first try. You maybe on the phone a while.

    I have seen several strange notes placed under my 2 negitive accounts. I susspect that any creditor can place nearly anything that they want on your report. For example, when I entered into credit counselling (4/10) with American Consumer Credit Counselling (ACCC) the creditors that were having may accounts managed by ACCC placed a note that said "Managed by professional Service". This notation was suposed to be a neutal mark in that was not suposed to negitively or positively effect my credit report. Well, it didn't seem to effect my score but you will not get any kind of credit card, loan or refi while that is there.

    Another myth about "Fair Credit Reporting" is that if you challenge a derog mark and they creditor can't conform it then it will have to be removed, true. But what do they have to do to prove it to be correct, nothing, the creditor just simply says - oh yeah, thats accurate and the derog stays. The onus is on the consumer to provid some type of documentation to support your claim. The creditor does not have to show any more proof, he just confirms it to be true. I have had to deal with this very thing with Discover. I challenged a 30 days late that i had proof was paid but just simply challenged it on line and didn't show proof. I thought, well this is a "no brainer" I'm clearly OK. WRONG!!!!. Discover just confirmed thier ding as correct and that was it. When I tried to challenge that reply I was rejected online as frivolous beciase as it was said to me in an e-mail from all 3 CRA. "That challenge was already investigated and shown to be correct per Fair Credit Reporting Guildlines". How can this be? I was forced to search out and find all my old statements, online statements and challenged each one via the US postal service and still had to fight it out. So far EQUIFAX and TransUnion have removed the mark but Experian has not.

    Two thing to keep in mind here. Save all you paper work and notes while going through all of this. Keep a 3 ring binder near the phone that you can jot down notes, times and what was said over the phone. Any letters that come in, stick them in your 3 ring binder. Number two, keep in mind that the credit reporting agencies in essence work for the lender. Thier Allegence is to them and not to the consumer. Credit reporting is a huge money making racket that cars little about you the consumer.

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