When my partners and I first started investing in non-performing notes, one of our biggest fears was what we call in the note industry, getting “wiped” on a note. Keep in mind at the time we were just venturing into delinquent second mortgages, a category of notes that many find risky for just that very reason BUT also much like 1st mortgages, 2nd mortgage notes are a secured investment backed by property AND are much less expensive. This was a time when there was a lot of equity still in the market and prices of real estate were actually increasing.
Our biggest fear was that a first mortgage on the property where we held our second lien would foreclose ahead of us and we would in essence get “wiped “. The reason for this is because the foreclosure attorney representing the first mortgage company at the foreclosure sale is only concerned about protecting their client’s interest and would either start the bidding at what the 1st mortgage was owed or at a number they’d be happy with.
In most cases, they start with what is owed, and in a down market like we’ve just seen, the bank will take most of the properties back as an REO (Real Estate Owned), and just liquidate them. If for some reason the bidding went beyond what was owed on the first mortgage any additional proceeds would be applied to any other secured liens (if there is any), and anything above that would go to the homeowner, (be sure to note that this is after any sheriff fees have been paid).
How Due Diligence Helps
As a newbie buyer to delinquent second liens, the one thing we did as part of our due diligence was to get clear on the status of the senior …read more