How to Determine if a 2nd Lender Will Foreclose

TomEason

LoanSafe Guide
Jun 18, 2009
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Here's how it works.

Banks typically spend money only on investments that will earn a cash $$ return (profit) to them quickly (no later than the end of their current fiscal year).

Furthermore banks don’t spend real cash $$ money on anything (except where there’s an almost immediate guaranteed return). Selling an REO is neither a guaranteed nor an immediate return on investment.

In the case of an underwater 2[SUP]nd[/SUP], the lender (bank) would need to spend real cash (as opposed to credit) to acquire an asset that’s worth less than their cost to acquire it. A bank would do this only if they’ve mistakenly overvalued the property.

To earn a profit on the foreclosure of a loan, the bank will need to get paid real money (cash) by re-selling that REO property to a buyer on the open market for at least a price certain.

Needless to say, the net proceeds of that sale needs to be greater than the total cost of paying off senior loans plus all the bank's costs of FCing and re-selling the REO, to include carrying costs, i.e. interest, taxes, insurance, HOA fees and utilities, presale fix-up costs, and marketing and selling costs (typically 8 - 10 percent of a property's selling price).

Those resale costs average about $50K; the costs are higher for more expensive properties.

The 2nd lender will make certain the selling price will yield the necessary net sales proceeds. In other words, the lender will ascertain the 2nd loan is clearly "in-the-money". If the loan isn't clearly "in-the-money," the lender most likely won't foreclose.

In order for a borrower to calculate the status of their 2nd loan, a current property valuation is essential.

From that valuation, the borrower subtracts the loan balance of the 1st, the loan balance of the 2nd, and $50K costs. If the remainder is negative, the 2nd is underwater. If the remainder is positive, the 2nd is "in-the-money."
 
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gb_mh

LoanSafe Member
Jul 5, 2012
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Hi TomEason,
I have a quick question. When calculating the loan balance of the 2nd, do you include all accrued interest there? Or is it just the principal balance only?
 

TomEason

LoanSafe Guide
Jun 18, 2009
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SF Bay Area CA
gb_mh

Thanks for your question.

A loan balances includes principal, all accrued interest and fees, i.e. all arrearages plus principal.

In other words the total amount required to pay off the loan in full.
 

gb_mh

LoanSafe Member
Jul 5, 2012
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Ok thanks. I presume your formula will also apply to 2nd loans which belong to a REMIC (that is, securitized) as well.
 

chabsin

LoanSafe Member
Oct 7, 2010
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The 2nd lender will make certain the selling price will yield the necessary net sales proceeds. In other words, the lender will ascertain the 2nd loan is clearly "in-the-money". If the loan isn't clearly "in-the-money," the lender most likely won't foreclose.

In order for a borrower to calculate the status of their 2nd loan, a current property valuation is essential.

From that valuation, the borrower subtracts the loan balance of the 1st, the loan balance of the 2nd, and $50K costs. If the remainder is negative, the 2nd is underwater. If the remainder is positive, the 2nd is "in-the-money."
Tom,

Do you mind clarifying: Why wouldn't a bank foreclose even if you are only partially "in the money"?

Say a hypothetical property is worth $500K, has a 1st with a $380K balance, and a 2nd with a $100K balance -- for a total of $480K. Sure, once you account for $50K or so in bank costs, the bank will not be able to recoup it's full $100K on the 2nd. But it would still be able to get $50-$70K -- which is still much more than the $0 they are currently getting. Why wouldn't they foreclose?

I think you've clarified this before, somewhere in the long "how to settle" thread, but even if you did I suppose here is a good place to make your answer easily accessible :)

Thanks for taking the time. "I'll take my answer off the air".
 

TomEason

LoanSafe Guide
Jun 18, 2009
12,390
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48
SF Bay Area CA
Hi Chabsin

Thanks for your question.

As stated in post #1,
Banks typically spend money only on investments that will earn a cash $$ return (profit) to them quickly (no later than the end of their current fiscal year).

Furthermore banks don’t spend real cash $$ money on anything (except where there’s an almost immediate guaranteed return). Selling an REO is neither a guaranteed nor an immediate return on investment.

In the case of an underwater 2[SUP]nd[/SUP], the lender (bank) would need to spend real cash (as opposed to credit) to acquire an asset that’s worth less than their cost to acquire it. A bank would do this only if they’ve mistakenly overvalued the property.
 

manwhorzzz

LoanSafe Member
Oct 3, 2012
20
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I was wondering what Tom or perhaps Evan thought about he mini bubble we are in in California again. I have a 2nd heloc that is underwater but its quickly getting close to being even. Im only about $50K upside down now whereas 2 months ago it was over $100K upside down. I live in San Diego and homes are selling for 10% more than they were just 3 months ago. Most homes in our neighborhood are being LISTED at way higher amounts than we had in 2006 at the top of the market. Im not sure how this is even possible other than there is a lack of inventory. Peoples incomes haven't gone up that much, so how can people afford these homes? Or who is buying these homes? Zillow says homes are valued at approx. $100K less than what homes are being offered at. Our neighbor two streets away is asking 470/sf on a 1450Sf house. Im also seeing agents do the huge range of asking price now in there listing ($650k-$700k.). I think that is insane. Ive talked to a few agents and they all say the sellers are very unrealistic. Everyone is asking prices that far exceed comps. appraisals aren't coming in even close to that so buyers will have bring in a lot of cash! The question is what will the buyers do. WHat do the experts in this forum think? is this real life happening again?
 

TomEason

LoanSafe Guide
Jun 18, 2009
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SF Bay Area CA
manwhorzzz

Thanks for your post.

As you know, comparable closed sales are what indicates the status of the local market: where prices are.

Buyers are behaving like they've historically always done - shopping very carefully.

And unless the buyer is making an all cash purchase, the lenders and the appraisers serve as another gateway that prevents the buyer from overpaying.

And, as you know, mortgage loans today are hard to qualify for, even for gold plated borrowers.
 

Evan Bedard

Call 1-800-779-4547
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Aug 26, 2007
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I live in San Diego and homes are selling for 10% more than they were just 3 months ago. Most homes in our neighborhood are being LISTED at way higher amounts than we had in 2006 at the top of the market. Im not sure how this is even possible other than there is a lack of inventory. Peoples incomes haven't gone up that much, so how can people afford these homes? Or who is buying these homes? Zillow says homes are valued at approx. $100K less than what homes are being offered at. Our neighbor two streets away is asking 470/sf on a 1450Sf house. Im also seeing agents do the huge range of asking price now in there listing ($650k-$700k.). I think that is insane. Ive talked to a few agents and they all say the sellers are very unrealistic
I would not be alarmed, sellers and their agents are taking advantage of the market and the lack of inventory so they will try to get as much as they can out of the sale. Remember (as Tom stated below) that it would cost the 2nd mortgage holder an additional $40K or more to re-market the home after foreclosure. There's nothing illegal about this, but the home is truly only worth what someone is willing to pay and the amount it appraises for. As you know, here in San Diego people flock from all over the world to enjoy the beautiful weather and gorgeous scenery. I've only lived here for about two years now myself and I don't plan on leaving anytime in the near future, or EVER!
 

Sunshinecop

LoanSafe Member
Mar 24, 2011
28
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Tom & Evan,
I want your opinion on something. I have been following the Strategy for Settling the underwater second mortgage for more than two years now and have not heard from the lender (Chase) in over a year.
Refresher:
Florida home
1st- Citimortgage- $364,000
2nd- Chase- $238,000
Value- $390,000 by my valuation, $419,000 by Zillow

Clearly I am way underwater and Chase will not foreclose on me any time soon. I am hoping for full forgiveness under the DOJ settlement. My problem is my house is in desperate need of a new roof and I don't want to part with my settlement money for the new roof until Chase decides what they are going to do. Any words of wisdom?
 
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TomEason

LoanSafe Guide
Jun 18, 2009
12,390
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SF Bay Area CA
Sunshinecop

Thanks for your post.

I wouldn't count on Chase granting you a full extingusihment of your 2nd.

Instead I recommend you replace the roof now, if you can afford to.
 

fightinback

LoanSafe Member
Sep 28, 2013
5
0
1
Hello! I've been using Loansafe's advice for awhile now and was able to re-fi my 1st earlier this year. I saw the info on how to settle your 2nd, especially with BOA. My home was underwater but I think the market has recovered in my area now (Washington, DC). My questions are: 1) How likely will BOA foreclose based on the following: 1st -203K, 2nd - (BOA) $44K; Zillow valuation estimate - $360K; 2)How long would the process take (in general)? I have not paid in 6 months and just received a call about them threatenining to foreclose. I want to wait it out and settle if I can. Thanks in advance for providing such useful information.
 

Larry2630

LoanSafe Member
Feb 6, 2009
59
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Hi Tom,

I apologize in advance for posting my inquiry here. Your thread "Stategy for Settling your Seconds" is already closed. Here is my story.

Am also a homeowner here in the Bay Area (Vallejo). Both loans were sold by BofA to Nationstar Mtg Jul 2013. 1st loan balance is over 500k and 2nd loan balance is 123k. Property value is 288k (per county's last assessment), meaning we're more than 50% underwater. We don't have any intentions of letting go of the property. Stopped paying both mortgages since Sept 2012 (14 default). Started paying the trial payment for the 1st loan this month. Last week, I called Nationstar to inquire about the modification status of my second loan and couldn't find my acct #. And when they did, they told me that it was zero balance and that my 2nd loan has been charged off. I was told that the loan is in collections and the collections agency will go after me. What are my chances of getting rid of my second loan being more than 50% underwater. Thank you.
 

Evan Bedard

Call 1-800-779-4547
Loan Safe Mortgage
Aug 26, 2007
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48
San Diego, California
www.LoanSafe.org
Last week, I called Nationstar to inquire about the modification status of my second loan and couldn't find my acct #. And when they did, they told me that it was zero balance and that my 2nd loan has been charged off. I was told that the loan is in collections and the collections agency will go after me. What are my chances of getting rid of my second loan being more than 50% underwater.
The collection agency is not going to come after you nor foreclose on your property, once the account is 180+ days past due it will be charged off and often sent to a collection agency. I wouldn't make any attempt to settle the account at this point, wait until the 1st mortgage mod is complete and sit back until you're approached with an offer. You'll likely settle for as little as 5-10 percent of the outstanding balance.

Good luck!
 

Evan Bedard

Call 1-800-779-4547
Loan Safe Mortgage
Aug 26, 2007
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San Diego, California
www.LoanSafe.org
My pleasure Larry, keep us posted and we'll do all we can to help guide you through the settlement process! I recommend you follow the "Strategy for Settling your Seconds" and start by reading post #1.
 

TomEason

LoanSafe Guide
Jun 18, 2009
12,390
84
48
SF Bay Area CA
Hi Larry2630

Thanks for your post.

There's a reason that thread has been closed. Every conceivable situation has been addressed at least once there. FYI all the posts remain available to read; I recommend you use the search tool on that thread to find your answer.