Buying 2nd Mortgage Note & Homestead Exemption

I am a relatively new investor (done lots of homework and moving towards first deal). The seller filed a Chapter 7 bankruptcy which has been discharged. They are now free to enter into contract to sell their home and have given us permission to talk with first mortgage lender.

There is so much value in property relative to first mortgage that I plan to just bring loan current, then continue payments till we fix and sell. We have the deed in escrow with our attorney, and before bringing first mortgage current will ensure that there are no other liens or encumbrances, except for the second mortgage. (It’s my understanding that a Chapter 7 wipes out all other lien holders except for first and second mortgages, but we will check before moving forward.)

The second mortgage was owned by Bank One, but when I called today they told me that there was a sale of this note pending to Franklin Credit Management Corp (which buys blocks of high risk and non-performing mortgages, then goes for the foreclosure). From my reading/listening it’s supposed to be common knowledge that you offer 10% and negotiate from there. If $25k second loan were owned by Bank One I was going to fax an offer to buy the note of $500 as the foreclosure has been completed and Bank One might be happy to get anything for their note at this time. Since mortgage sold to Franklin Credit, I’m not sure if it will be easier or harder to negotiate and am looking for guidelines on how to approach them. This note purchase is so new that they don’t even have loan info on their system yet, but will in the next few days. Also, I want to treat the sellers well and am not sure, that if I buy a release of the note rather than the note itself, whether Franklin Credit will be able to go after the sellers for the balance of note if not secured by the house.

Any comments appreciated. Thanks!

Howdy Noela 1:

BK does not wipe out judgements and liens on real estate so make sure you check with title company.

I am confused about second mortgage. You said foreclosure completed by Bank One then they would own the house and not the sellers. If no foreclosure then second still valid, If first mortgage forecloses then second worthless except as a collection item which may have been ajudicated from collecting in the BK if it were actually discharged. It can be confusing.

If second is valid they may still be willing to deal but if there is plenty of equity they may not be so negotiable.

I am also confused about Chapter 7 discharge or dismissed. Homestead can be exempted from a Chapter 7 case if the debtors so desire.

Get your attorneys advise and get it all straight. You have some things a bit confused or maybe it is me.

I appreciate you wanting to take care of the sellers. It must be a win win deal to work.

Hey Ted, thanks for the reply. Been in telephone and email “black hole” with modem burned out by electric surge through phone line, and my ISP having their own main computer fried. Lots of lightning around here!!

Now to some clarifications as I was not as clear as I could have been. Title search shows only a first and a second mortgage. All other liens cleared out by Chapter 7 Bankruptcy which is complete and discharged. CitiMortgage holds first position and has started foreclosure proceedings. They also filed a motion against both the original owners and Bank One as second mortgage holder. They did this through MERS (Mortgage Electronic Registration System).

If second mortgage holder is difficult to deal with (wants too much money to buy note and clear 2nd), I’ve read that one option is to short sale/buy first mortgage and then foreclose on the second, but that leaves me with questionsz: If I “own” first mortgage (can place property in a trust controlled by a third party, and not directly foreclose on my own property), and then foreclose, do I have to put property up for public sale? Anyone have insight into the process here? I want to wipe out second but not lose control of property.

Thanks again Ted for your earlier thoughts.

Howdy Noela:

Foreclosure is a public sale of the property. If you have the deed and the first lien you could foreclose like you said and wipe out the 2nd mortgage. At the sale you can bid any amount you want to for the property as the lender. There may be a buyer there willing to pay close to retail and give you a good profit for your efforts. Most buyers are bottom dwellers and will only pay wholesale. You do not have to sell at wholesale all you have to do is instruct trustee to be the high bidder up to a certain price where you would be willing to sell.

What motion did Citimortgage file ?

One thing to clear up: Short sale is buying note at discount like you are trying to do with the second mortgage. Buying the first would not actually be a short sale. You could try that but they probably will not discount since there is equity. If you could buy the first you would be in the drivers seat for sure. I have done it once and bought a $28,000 loan for $4000 and foreclosed on the owners who neglected the property and thought they would never lose the house. She could not believe when I was standing there bidding $28000 on her. I was hoping she would bid $28001 and she would have owned it. I still made a great deal and converted it to a duplex.