"shorting second" deal - Posted by Jason

Posted by diond on October 08, 2003 at 22:52:24:

I have done this type of deal with us bank and citigroup. in each case they intended to payoff the first in order to move up to 1st position and ultimately have the best opportunity for maximum recovery on their 2nd position loan.

i dont see the 2nd lender short selling or discounting very much in this situation. but, who knows? if you dont ask for it you’ll for sure not get it!

“shorting second” deal - Posted by Jason

Posted by Jason on October 08, 2003 at 15:25:57:

brief rundown of the deal:

ARV: 100,000-110
1st mort: 55,000
2nd mort: 60,000
repairs: 3,000
This deal is contingent upon getting a short from the second. THe seller has deeded me the property. I’m gonna pay off the first. Seller says the second told him before he spoke to me that they would like to pay off the 1st (so as to protect there interest).

Now that I have the deed and will be paying off the first (obviously I won’t let the 2nd know this with the foreclosure a week away), how willing will the second be to take a deep discount (I’m gonna start at 6K)? I know that normally they would discount but their wanting to buy the first out has me confused as to how they will react.

Once I get in touch with the second and have a brief conversation, how should I present my offer to the second? (just nice letterhead explaining the offer and that I am “buying” the first and will continue to foreclose if I can’t get a short)?

thanks for the help

Re: “shorting second” deal - Posted by wpage

Posted by wpage on October 09, 2003 at 10:12:02:

Jason You should not just pay off the first mortgage because that would allow the 2nd. to become a 1st. mortgage; then you would lose your leverage in the discussion. You should take over the first under subrogation, which means that you are buying the mortgage and taking over their position which will allow you to continue the foreclosure.
However, the second could always pay the arrears on the first,then foreclose themselves. Then you would be required to pay them to keep the property.
HTH wpage

Re: “shorting second” deal - Posted by B.L.Renfrow

Posted by B.L.Renfrow on October 08, 2003 at 17:06:10:

Your idea of how to approach the junior note holder is flawed. First, from what you posted, you are not buying the first, you are planning to pay it off. That means the note in second position would then become the first. To tell the junior lienholder you are “buying the note”, when you aren’t, won’t gain you anything. You apparently took title to the property, but the first is still owned by the original note holder.

Second, under federal law, the junior lienholders have the right to bring defaulted senior notes current in order to protect their position. Therefore, telling the second that you “would continue to foreclose” if you did own the first (which you don’t) is incorrect. If the second chooses to bring the first current, that is their right and the first CANNOT refuse to allow their note to be brought current.

Since the second has indicated their intent to bring the first current, it’s questionable whether they would entertain a short sale offer. But it can’t hurt to try. What you should do is call up the second, and once you reach someone in the loss mitigation department with decision-making authority, tell them – after faxing the borrower’s authorization to release information – you are trying to “help out” the borrowers. I would not suggest that you stress your position as an investor, nor start faxing stuff on fancy letterheads. Just be a helpful, low-key “friend” of the borrowers trying to help them out of a difficult spot. It wouldn’t hurt to mention that the borrower has considered bankruptcy as an option. After all, it’s always an option, whether they remembered to bring it up or not!

Simply ask them if they would consider either selling their note or entertaining a short sale offer. Some will do one, some will do the other, some both and some neither.

Since the sale is looming (I presume that’s what you mean when you say, “foreclosure in one week”) it would probably be quicker if you simply took an assignment of the second’s note rather than going through the whole short sale process.

Unless the sale can be postponed, a week would probably not give you enough time to put together and submit the short sale package.

If the second will sell you their position, then you can go ahead and pay off the first if you have the cash and that’s what you want to do, or you can simply pay the arrears amount, bringing it current and continue to make payments on it while you decide on your exit.

Brian (NY)

Re: “shorting second” deal - Posted by Vlad

Posted by Vlad on October 08, 2003 at 21:18:38:


when the 2nd brings the 1st current do they just pay the arrears or buy the mortgage itself? I understand that they may buy, but would they just bring it current without buying? And if they just do the latter, who ends up with the bill, so to speak? Do they add reinstatement amount to their own (2nd) mortgage?


Re: “shorting second” deal - Posted by B.L.Renfrow

Posted by B.L.Renfrow on October 09, 2003 at 12:48:36:

They could do it either way, depending on the specifics of the deal. If the second pays off the first, the second’s position is stronger, as they then become the first.

As to the amounts the second has to put up to protect their interest, yes, that would be added to the amount due.

Brian (NY)