Buying note from bank - Posted by JohnBoy

import · March 13, 1999, 9:42am

Posted by drew on March 13, 1999 at 15:21:50:

…because it sounds like they are talking about an accounting entry (i.e. $20k loss on Mr. X mortgage). “Taking a charge off” means that they are taking the loss of $20k by selling the mortgage at a discount. This should not affect the Seller’s credit, but the prior late payments will. The Seller should just be paying on the note (to you) as is and the bank gets to reduce their earnings by $20k instead of getting the property back.

Talk to the bank again, to me it just sounds like there is a misunderstanding of bank/accounting lingo. Good luck!

-drew

import · March 13, 1999, 9:42am

Buying note from bank - Posted by JohnBoy

Posted by JohnBoy on March 13, 1999 at 10:42:53:

I’m working with a lender on buying one of their notes that is in preforeclosure. The lender will sell me this note at a $20k discount. The note is only a year old and was loaned at 85% LTV. The seller just wants to deed the property back to the bank, the bank of course doesn’t want the property back so they agreed to sell their note to me.

I can have the seller first deed the property over to me and then buy the note from the bank before I record the deed. The bank has no problem with this and has even called the seller and ask if they would be interested in talking to me and showing me the house. They said yes. This is the part I don’t quite understand:

The bank said after they sell me the note at a discount they would report a charge off on the sellers credit for the $20k they discounted the note for. How can they do that if they sold me the note and agreed to the discount? That doesn’t seem right in this particular situation. They would be selling me their paper without actually taking back the property. To me this would seem to be the same as when a bank sells your mortgage to another company. If they sell your mortgage at some kind of a discount that would be like them coming back saying, oh by the way, we sold your loan to xyz company and you should send your future payments to them. Since we sold your loan for less than face value you are still required to pay us the difference or we will have to report this amount as a charge off to your credit file. You see my point here? In addition to this, since I would be the one owning the note it would now be my problem to foreclose on the seller if they weren’t willing to deed the property back to me. If I had to foreclose, the seller would owe me the face value of the note plus my costs to foreclose. Then I would be able to report the difference owed to me against their credit file. So how could the bank and myself both file the same claim against the seller? This would mean the seller would actually owe $20k more than what they borrowed in the first place?

Now if the bank was to take the property back in lou of foreclosure and then sell it to me at a discount I can see where they could charge off the loss against the sellers credit file. But not if they sell me the note while the seller is still holding legal title in their name. I should mention that the bank has also agreed to finance this note 100% for me also, but I don’t think that would make a difference.

Is there something I’m missing here or is the bank confused on this issue?

import · March 15, 1999, 8:09am

Re: Buying note from bank - Posted by Tim Kimball

Posted by Tim Kimball on March 15, 1999 at 09:09:31:

when you called the bank, who did you speak with about buing their bad paper? (i.e. vice pres. in charge of aquisitions or something like that)

btw, I think maybe you are worrying a little too much about this charge-off thing. There are laws that protect the debtor. Just protect yourself and it will be ok. Anyway, if you hadn’t stepped in the bank would have gotten hurt. They do every time someone defaults. It seems more appropriate that the person who failed to live up to his/her obligatons bears the loss.

import · March 13, 1999, 11:24am

Re: Buying note from bank - Posted by David Alexander

Posted by David Alexander on March 13, 1999 at 12:24:06:

Maybe, you should have or should try to leave it as two seperate transactions. One you are buying a note a discount, and two your are getting a deed from a motivated seller. Regardless your getting the deed and you should be able to make money, put it in a trust and sell it on contract for deed. The 20k and better underlying financing will be gravy it sounds like. Did you promise the seller that you would save their credit, is that the rub?

I myself would like to hear how you negotiated a 20k discount with a bank and got them to finance. I was always under the impression that you had to be dealing in portfolio’s with banks.

David Alexander

import · March 13, 1999, 10:43am

Re: Buying note from bank - Posted by Bud Branstetter

Posted by Bud Branstetter on March 13, 1999 at 11:43:32:

JohnBoy,

Not addressing your question there is another thing to be concerned about. When someone gives a deed in lieu it does not guarantee title. If they had a judgement against them, it survives, and can come back against the property. You can buy title insurance at the time or you can foreclose the mortgage.

Another item-get an affidavit from the people on how much is actually owed before buying the note.

import · March 13, 1999, 12:37pm

Re: Buying note from bank - Posted by JohnBoy

Posted by JohnBoy on March 13, 1999 at 13:37:42:

This would be two separate transactions. I didn’t promise the seller anything. The seller just wants to give the property back to the bank at this point.

As far as getting the bank to discount the note and finance it, I just asked. I asked them if they ever get any bad paper they would like to sell off which would save them from going through the foreclosure process. He said all the time. I said if they would be willing to finance it I would be interested in anything they have. He said that wouldn’t be a problem. They just did a loan for me so they already new what my credit was like.

He told me he has a property that they refinanced at 85% LTV less than a year ago. They will sell me this note at a $20k discount because the seller is delinquent on the payments.

If the bank sells me the note then the $20k they discounted would be mine to collect on since I would own the actual note. So how could the bank charge that amount off against the seller? That would mean the seller would owe both the bank and myself the same $20k meaning the seller would actually owe $20k more then they borrowed. If I bought the note and then I took the property back from the seller in lou of foreclosure then I would be the one that could charge off the $20k against the seller if I sold the property for $20k less the note, not the bank. The bank never would have taken title to the property.

Since the seller is just willing to give the house back, then I would go look at the property and if I wanted it I would have the seller deed the property over to me. Once I have the property deeded to me and before I record the deed, then I would make sure I can get title insurance and that there aren’t any other liens against the property. Then I would buy the note from the bank. Once I have purchased the note then I would record the deed and sell the property to another buyer on contract for the retail value getting a down payment up front and collecting on the spread every month.

Another way I could sell the property is by getting a buyer that would qualify for a new 80% LTV mortgage. Get $5k-$10k down, have them put a new first on the property at 80% LTV and carry back a second. This way I’m off the loan to my bank and I would carry a $15k - $20k second depending on the down payment amount my buyer has.

What I don’t understand is how the bank could report a charge off against the owner for the discount they gave on the note to me. The bank never repo’d the house. They only sold me the note at a discount, so that would be their loss, not the sellers. Once I own the note then the seller is liable to me for the face value of the note. It would be up to me to collect on the note at this point or let the seller out of it by taking the deed in lou of foreclosure.

I would think the only way the bank can report the $20k as a charge off against the seller is if they actually took the property back in lou of foreclosure and THEN sold me the property for $20k less than what they had into it. Is this correct or not? Am I missing something here?

import · March 13, 1999, 12:40pm

Re: Buying note from bank - Posted by JohnBoy

Posted by JohnBoy on March 13, 1999 at 13:40:49:

Thanks Bud,

That was my intention before recording the deed. I was going to go to the title company and have them run a title search and sell me title insurance before I commit to buying the note.