Case Study 1 - Dealing with Two Mortgages

Woman Dealing with 1st and 2nd Mortgages

A young women called me from my ad in the paper.  She was not quite 3 months behind in her payments to the first mortgager.  She was getting default notices from them wanting her to pay up.

She was also behind in payments to the 2nd mortgager but since they were more affordable, she was making those payments, not on time, but not 3 months behind either.

I told her I would try to help her.  That what I did was to "talk to her bank and try to get them to accept less on her mortgage than was actually owed and considered it paid in full.  Banks will do this but mostly not until the mortgagee is 3 full months behind and they are in foreclosure.  This means I would end up buying the house from the bank and it would be mine." 

I did not tell her to stop making her payments.  I told her here's how I can help you.  Then it is her choice what she does next.

Her monthly income was $40 more than the total of both the 1st and the 2nd.  It was pretty easy for her to decide what to do.  But I did not tell her what to do.  That is very important.  This is a life changing decision for her.  I do not want to be the one she blames for making or not making her payments.  It must be the sellers decision.

The seller signed all the papers and I got to work.  When I called the 1st mortgager, they already had done a BPO.  The number was in the $90,000's.  It was a Freddie Mac loan - FHA - so they needed a percentage of that number as a net to them.  They needed $82,800.00.  That was a good number!  Now I just needed to get the second mortgager to agree on a short payoff. 

This house was in a good school district.  I knew the area very well since I had grown up around the corner.  The house used to be a 2-family.  Previous owners had taken out the center wall and one kitchen and made it into a single family.  Four bedrooms, 2 full baths, deck, brick, replacement windows - a good deal.  It needed a new roof, carpet -the dogs had peed in the house, and a paint job.  If I could get the 2nd mortgager to $1000 (That's all Freddie Mac would allow as a short sale payoff) I would have a super deal.  It would resale for up to $140,000.00 today, after $10K worth of repairs, of course.

Of course, the 2nd mortgager was not that easy.  At first they wanted a minimum of $10,000.00 as a payoff.  I had offered $500.  My job now was to get them to $1000 - Freddie Mac says.  We went back and forth.  Finally they reduced the number to $5,000.  I still wanted lower - A) because I am cheap and wanted a better deal and B) Freddie Mac said it had to be. 

We continued going back and forth.  Occasionally, the 2nd mortgager would call the seller...at work...threatening pay now!  He wanted money.  While I believe he was in the loss mitigation department, not customer service, he was never very friendly with the seller.  They never did actually file foreclosure.  They were just letting the 1st mortgager accrue the expenses and they were just waiting. 

He also continued to tell me they would file a deficiency judgement against the seller for the difference.  "You never know, in 5 or 7 years she may come into money, she may get married and then 'they' would be responsible to pay the debt." 

The seller filing bankruptcy didn't make a difference to him.  Knowing that if it went all the way to foreclosure they would not get a dime as it was over-financed on the first mortgage made no difference to him either.  I assumed he was paid on commission.  I do not know that.  However, many 2nd mortgages have taken either $500 or $1,000 as a payoff and considered it paid in full.  Especially after they know that the first mortgage is a FHA loan and can only accept $1000 as a short sale payoff.

Through continued negotiations I must have made him mad.  He went back up to $10,000 as a payoff and swore he never said $5,000.  I was getting pretty disgusted.  After a few more phone calls, he did go back to $5,000.

My private lender wanted me to use his money and close.  My investor friends said to quit quibbling over $4,000.00 and take the deal.  The foreclosure date was in 3 weeks.  So I gave up.  I went back to the 1st mortgager to be sure of the final payoff to them.  I told them I had gotten the 2nd mortgager to $5000.  As I said that, I remembered that it wasn't just because I didn't want to pay that much, Freddie Mac's regulation to take the short pay off was no more than $1000.  I told her I would work on it again and get back to her.

I thought I had new and better ammunition now.  I told the 2nd mortgager I could not pay the $5K because of Freddie Mac.  They'd have to come done.  He said I could pay it under the table.

I said I would not do that.  I was not sending him money.  I was certainly not doing anything that was not fully disclosed on the HUD-1. 

He was pretty stubborn.  And so am I.  I was not paying money under the table that did not appear on the HUD-1 statement.  There have been too many investors in the newspaper with bad press for not disclosing everything they did on a deal.  I was not ending up on the front page by paying under the table.  I was a past president of the State investors association and I was not doing anything that would damage investors' names or local investor associations.  He assured me no one would know about it.  I would.  I'm not taking the chance.  He finally said he would talk with his supervisor and see if they can't figure a way out. 

He called me back with an OK way to get it done.  It wasn't as good as don't pay it - we'll accept $1000.  And I didn't mind so much paying the money.  However, I was paying it AND sleeping well at night. 

What his boss had said was for me to pay $4,000 to bring the loan current.  Then, once the loan was current, they would accept a short sale of $1,000.  That number could go on the HUD-1 statement as a 'payoff for the short sale.' 

Often, this is not a good idea - paying money on someone else's account.  At this point, we had created some rapport.  He respected me if nothing else.  I also told him I did not want to pay on her account.  If they also put in writing that I would receive my $4,000 back if the deal did not close then I would meet him the next day and pay the money. 

The 2nd mortgager put this in writing.  The also put in the letter that the seller would not get a 1099.  The 2nd mortgager changed his mind often.  This was a better deal so I said nothing.  Just know that rapport sometimes only goes so far.

The first mortgager got me a written payoff statement and approved the HUD-1 prior to my paying the $4,000.  Fortunately, the 2nd mortgager was in town and I paid them the morning of the closing.  That would not have worked so well if he was out of town and I'd have to overnight the money to him.  The payoff and HUD-1 approval statements had come the night before - after late overnight package pickup had stopped.

There was one other glitch on the HUD-1.  The purchaser that was listed on the HUD-1 was the name I had on the original purchase contract - my trustee's name and LLC.  The 1st mortgager hadn't looked at that and expected my name as an individual on the HUD-1.  They ended up putting my name on the HUD-1 as the beneficiary.  The deed still went to the trustee.  They just wanted to be sure I was involved in the deal.

After all these things took place, the title company overnighted the money to both the 1st and 2nd mortgagers and I am the proud owner of a house...after repairs worth $140,000.00 via negotiation!

This is a Short Sale Case Study from the files of the Short Sale Queen®.
Read Short Sale Case Study #2 and learn how to Build Rapport with Loss Mitigators

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