REI Wealth Magazine Featuring Paul Finck

"In looking at a foreclosure, a lender has to strategize.In the case of the second mortgage, it is imperative that the first does not foreclose out the second as there is usually nothing left over from the foreclosure to pay the second." M any lenders opt to only fund first mortgages because they believe that second mortgages are too risky, but is that always the case? Not always. Not all second mortgages are equal. Many private lenders may choose to fund a junior lien where the first mortgage is relatively small in comparison to the second. For example, a $200,000 second behind a first of only $40,000 on a property worth $500,000 would be an attractive loan to fund for many lenders, especially if they can command a higher interest rate due to the fact that the loan is in second position. However, if there is a foreclosure in the future, the second will somehow have to deal with the first mortgage. This can be troublesome if the first is very large; especially if the second is relatively small in comparison to the first. Why? In looking at a foreclosure, a lender has to strategize. In the case of the second mortgage, it is imperative that the first does not foreclose out the second as there is usually nothing left over from the foreclosure to pay the second. In California, the foreclosing party gets to “credit bid” its loan. This means that it can simply bid [at the auction/trustee sale] what it is owed. Non foreclosing parties need to come up with cashier’s checks in order to bid. This can be a potential hardship for the second mortgage if the first is the foreclosing party. For example, if we look at a situation where the property has a value of $1,400,000, the first is $800,000 and the second is $200,000 and the first is the foreclosing party, the first would most likely credit bid its entire $800,000 [it does have the right to bid less than what it is owed, but, if the value is reasonably higher than what is owed to the first, it will normally credit bid what it is entirely owed. The times where the lender bids lower than its entire principal balance is when the lender does not want to own the property and is willing to take a loss just to get the loan off of its books, or the value of the property does not substantially exceed the balance of the first mortgage]. Any bidder at the auction/trustee sale would need to come up with $800,000 at the auction itself or more should any bid exceed $800,000 if the bidder wants to be the highest bidder. In this instance [where the first mortgage is the foreclosing party], the second is not allowed to credit bid its $200,000 balance. It would need to come up with the $800,000 to pay off the first and its $200,000 second mortgage in order to be made whole. True, the second would just get its $200,000 back because that is what it is owed, but, unfortunately, in this case, since it was not the foreclosing party, it has to come up with cash just as any other bidder. Only the foreclosing party is allowed to credit bid. 57

REI Wealth Magazine Featuring Paul Finck | Page 57