As a plugged-in reader noticed, 3271 Baker Street hit the courthouse steps yesterday and ended up selling for $61,000. As a plugged-in tipster notes, however, the foreclosure was initiated by the holders of a third note (who had loaned $425,000) and a first and second mortgage came along with the sale.
Once again, listed for $3,395,000 two years ago but last asking $1,895,000 as a short sale with a self-reported $7,300 in monthly rent. And also according to our tipster, it was the holders of the third note who were yesterday’s winning bidders.
UPDATE: Let’s see if we can’t pull a few things together and clear a few things up.
3271 Baker was purchased in November 2006 for $1,700,000 by way of a $1,000,000 first and $425,000 second courtesy of Countrywide which would suggest $275,000 of the buyer’s cash was involved at the time.
A third mortgage in the amount of $425,000 was written by Pacific Equity Capital in October 2007 (which was then assigned by PEC to three individuals) and the property was subsequently remodeled.
In July 2008 the remodeled 3271 Baker returned to the market listed for $3,395,000 (a list price which was subsequently sliced, diced and chronicled on this site). And in August 2009 with the note in default and $495,231 owed (principal, interest, and fees), the holders of the third mortgage filed to foreclose (enter a failed bankruptcy bid on the part of the owner).
Unable to successfully negotiate a short sale having reduced the list price down to $1,895,000 this past June, yesterday the third mortgage successfully foreclosed on the property with a winning bid of “$61,000” on the courthouse steps. The foreclosure effectively extinguishes the third mortgage and the underwriters of the third now own the property subject to the terms of the first and second mortgages and their balances due.
As a couple of plugged-in readers correctly noted (and we originally screwed up in a since redacted note), as both the foreclosing lender and winning bidder, the third mortgage holders have effectively invested $425,000 plus forgone interest and fees in the property to date, the $61,000 bid was essentially a pass through.
And as a plugged-in “EBGuy” digs up, there’s even more going on behind the scenes.
The history of the Marina property in headlines and links:
∙ Spanish/Mediterranean Flair From Traditional To Modern: 3271 Baker [SocketSite]
∙ The Mysterious Case Of The Baker Street Trio: 3271, 3212 and 3520 [SocketSite]
∙ Paying A Premium To Rent To Own: 3271 Baker Is Back [SocketSite]
∙ Facing Foreclosure 3271 Baker Street Makes A Move In The Marina [SocketSite]
∙ 3271 Baker Street: It’s Complicated (And Back On Craigslist) [SocketSite]
∙ Failing Grades In Auction Buying 101 (And Commenting) [SocketSite]
Thanks for the followup on this mystery. So the new owner paid $61k and now owes $425k making the total effective outlay $486k ? That still doesn’t seem right that this would sell at such a bargain price. I’m probably not properly understanding the finances here.
And there are some interesting comments in the former thread about the prior “owner” being a convicted con artist.
New owner owes $486,000 on the 3rd mortgage. Plus the balance of the $1,000,000 1st mortgage. Plus the balance of the $425,000 2nd mortgage. So they’re in for roughly a little under $1,911,000. (1st and 2nd were both initiated in Novemebr 2006…so likely a hefty balance on each.)
That’s not quite right, Milkshake.
The new owner believed there was $61K in equity beyond the 1st and 2nd mortgages. So they paid the amount of the 1st mortgage + the amount of the 2nd mortgage + $61K.
Diemos said on a prior thread that the 1st mortgage was one of the previous sale prices of $1.969M, and he also mentioned a 2nd mortgage NOD with $473K owed.
That would put all-in at $2.503M, and the original debt on all 3 mortgages would have been at $2.867M, based on those numbers.
jason, that’s not quite correct. The new owner doesn’t owe ANYTHING on the 3rd mortgage because the 3rd mortgage was extinguished through foreclosure.
If the 1st is $1M and the 2nd is $425K, then they’re in for $1.486M, which makes more sense than diemos’ numbers.
Uh… so the holder who was owed $425K put out another $61K to own the house, which had been listed as a short sale of around $1,895K (presumably meaning that all three outstanding loans totalled somewhere around $2M???, including the $425K), so he/she sort of bought the house with $486K down and mortgages of around, say, $1.7M.
Am I getting this sort of right?
Yes, but the new owner IS the 3rd mortgage holder! So tecnically they are “out” the $425,000 they loaned, that they never got paid back. Wether you consider it a past write off, or part of this investment, they are still out those funds.
Well, now you understand the behavior of the SFGate-featured buyers who bought a 2nd note. This is not legal advice.
Foreclosure on a mortgage extinguishes the note being foreclosed and all junior liens to that note.
If you foreclose on a 1st mortgage, you also extinguish all junior liens (tax liens are always senior to mortgages), so that you have clear title to the property as long as all taxes are paid. The price the buyer is paying is the amount of the bid (+ any senior tax liens, if any).
If you foreclose on a 2nd mortgage, the property is taken subject to the 1st mortgage. The price the buyer is paying is effectively the amount of the bid + the amount of the 1st mortgage (+ any senior tax liens, if any).
If you foreclose on a 3rd mortgage, the property is taken subject to the 1st and 2nd mortgages. The price the buyer is paying is effectively the amount of the bid + the amount of the 1st + the amount of the 2nd (+ any senior tax liens, if any).
“So tecnically they are “out” the $425,000 they loaned, that they never got paid back.”
That’s true and should be considered as part of the 3rd mortgage holder’s costs. But that’s not what counts as the bid amount on the house itself. Presumably, the owner of the 3rd lien had to bid $61K because someone else bid $60K, and if that other person had won, the 3rd mortgage holder would still be out the bucks, unless they were eligible to seek a deficiency judgment and sought the deficiency judgment and then collected on it.
If no one else had bid on the house, then the 3rd mortgage holder would only have had to bid $0.01 + 1st mortgage + 2nd mortgage. As such, I have no problem saying the sale amount was amount of 1st + amount of 2nd + $61K.
Btw, BobN is closest here in his description of the scenario. It is as if the 3rd mortgage holder bought the house with $486K down with 2 mortgages pre-existing. The fair market value of this house is amount of 1st + amount of 2nd + $61K because of the foreclosure at that sale price, so it is as if the 3rd mortgage holder is now underwater, eating up $425K of his/her downpayment.
Ahh…I see your point. The 3rd mortgage holder was out their $425k regardless of wether they bought this property or not. Any other party would only be responsible for the 1st, 2nd, and their auction bid. Gotcha. We’re on the same page. 😉
Good that we’re on the same page. You can also see it as the 3rd mortgage holder already having a sunk cost of $486K from whenever the loan was made. Even when the 3rd mortgage holder paid $61K yesterday, it was paying the $61K to itself, so no money really changed hands yesterday.
$60K would have been quite a big haircut on their loan, so I guess they’re figuring they can get more if they sell it themselves, and that’s why they bid $61K.
Whoa, confusing thread.
The holder of the third note foreclosed, wiping out any leins junior to that note. The first and second is still owed and since the holder of the third bought it from himself, the third now has the right to go after the homeowner for the entire balance.
Typically, the third is not a purchase money loan, so the holder of the foreclosed note can get a deficiency. The only thing different is that they changed it from a secured claim to an unsecured one.
Because it went for higher than the opening amount, someone bid against the holder for it. Possibly the homeowner, which would extinguish the obligation for 12 cents on the dollar, but he was unsuccessful, or possibly someone who would basically be a debt collector. In any event, the original holder of the note got it back and can now go after the homeowner for the entire amount loaned. The homeowner is not better off by any of this and possibly now has additional costs for which he is liable.
And whoever started the term “new owner” is incorrect. There is NO new owner. The property owner is still the property owner, the holder of the third mortgage is still holding, but is now holding an unsecured debt. That too is no different, because the security had already been wiped out in the decline in value of the house.
OK, revised.
So, the new owner essentially paid $425K down and owes the balance of the two outstanding mortgages, as the $61K yesterday was paid to him/herself. I assume there are also fees, taxes, etc.
With the alternative of waving goodbye to $425K, the new owner took the chance of being able to sell at some point in the future for more than the two mortgages, taxes, and holding costs and mitigating or, crossed fingers, covering that potential loss.
Still sort of right?
“The first and second is still owed and since the holder of the third bought it from himself, the third now has the right to go after the homeowner for the entire balance.”
This is not correct. The 3rd mortgage holder/now-owner can only go after the homeowner for the balance of the 3rd mortgage (assuming he/she qualifies to do so). The 3rd mortgage holder/now-owner has now assumed the 1st mortgage and the 2nd mortgage and must pay them.
“And whoever started the term “new owner” is incorrect. There is NO new owner. The property owner is still the property owner”
This is not correct either. A foreclosure sale is a sale of the property, not a sale of the debt. In this case, the property was sold subject to the 1st and 2nd mortgages, and the former 3rd mortgage holder is the new owner.
If you wanted to sell a note, why would you need to foreclose on the house to sell the note? You can just sell the note!
OK, now tipster’s comment has me thinking I’m utterly wrong, so I’ll bow out and let people who might know what they’re talking about sort it out. 🙂
But one thing: Possibly the homeowner, which would extinguish the obligation for 12 cents on the dollar
Is the defaulting debtor even allowed to bid on his/her own mortgage?
“Is the defaulting debtor even allowed to bid on his/her own mortgage?”
I believe, yes, but then the 3rd mortgage holder, in this case, would rationally bid up either a) the amount of its note, so it gets paid in full, or b) the amount it is willing to take for its note.
So for example, if the defaulting debtor (or anyone, really) bid $450K, the 3rd mortgage holder might have taken it and called it a day. The defaulting debtor (or other buyer) would still owe on the 1st and 2nd mortgage.
I’ll try again.
This didn’t have any effect on the first and second mortgage. It’s still owed by the homeowner. There is only one homeowner here.
When the third forecloses, he doesn’t take title to the property. Title to the property only passes when the first forecloses because no one else has any senior interest in the property at that point, but that did not happen here.
What happened here is that the holder of the third had a secured note that wasn’t being paid and the security had evaporated. To go after the homeowner personally, he had to foreclose. That did two things. First, it wiped out any junior liens, if there were any. And it lets him go after the homeowner’s other assets for the entire amount of the third mortgage. Obviously, he can’t go after the homeowner for the amounts of the other mortgages. They were unaffected.
They do not take title to the property because there are other parties with more senior interests than theirs. All this did was to convert a secured note to an unsecured debt. It probably added a lot of fees.
Anyone could bid on the third: the debtor, the holder or someone else who wanted to try their luck collecting on it. The holder can outbid anyone if they wanted to. They could bid a billion dollars for it if they feel like it, but they probably had a number in their head well under that, that they would have been OK to let it go for. If someone had bid $300K for it, they would have taken the $300K I’m sure, and handed the lucky winner the note. The number in their head they were willing to settle for was higher than $60K, so when someone else bid 60K, they bid 61K. Someone *did* bid 60K, because the opening bid was 50K.
“And it lets him go after the homeowner’s other assets for the entire amount of the third mortgage”
Does “third mortgage” in this line mean 61k or 425k?
“They do not take title to the property because there are other parties with more senior interests than theirs. All this did was to convert a secured note to an unsecured debt. It probably added a lot of fees. ”
You’re still wrong, tipster. If you want to sell the note, you can always sell the note easily. This is done by banks and other mortgage holders all the time.
You foreclose in order to sell *the property*. The property changed hands here, and the 3rd mortgage holder took the property subject to the other 2 mortgages.
Why would you convert a secured claim that you have a chance of collecting on to an unsecured claim that is almost certain to be uncollectable? And why would you observe all the formalities of foreclosure, including paying filing fees, etc. in order to do it?
Here is a quote from a law school outline at http://lawschool.mikeshecket.com/realestate/refoutline.htm:
“What if a second mortgagee forecloses? Who owns what? The purchaser at foreclosure gets the title as it was just before the mortgage was entered into, namely, they take the property encumbered by the first mortgage.”
[…]
“When the second mortgage forecloses, the first mortgagee receives none of the proceeds of the sale, but the mortgage is still in effect. The first mortgagee can foreclose later.”
Tipster, sorry, but that’s wrong. Title to the property did pass to the winning bidder yesterday. They are the new title holder and can take possession of the property if they wish.
It is correct to say that it did not impact the 1st and the 2nd, but they do not have title to the property, only liens against it.
I think you may just be confusing the terms title and liens. Whoever bought at sale yesterday, even if they bought their own note, is now the title holder to the property and could move in and live there. As long as they keep the 1st and 2nd current, it’s their property!
Btw, it is entirely possible that the 1st and 2nd mortgage holder could have a due-on-sale clause. If so, they can force the 3rd mortgage holder/new owner to pay them off because the property was sold. However, they may want to keep the mortgages active if they are at a favorable rate and the new owner is solvent.
425K. That’s what’s owed.
Someone bought the right to collect it for $61K. But $425K is what was owed and that is unchanged.
The only way out of that would be if the homeowner himself had bought it at the auction. Then that would be the end of it, and it only would have cost the homeowner much less than the amount of the third note. But that didn’t happen here.
Here is a link to the lawsuit filed by (I think) the third lien holder (who foreclosed). If the allegations are true, you can see why they eventually threw in the towel and just went the foreclosure route. Definitely worth a read. Allegations include: the owner represented that his income was $47,000.00 per month on the loan application…[but] in fact was zero. The note holder then tried to do a rent back agreement, but it looks like that didn’t pan out as the owner occupied the premises and declared bankruptcy. Don’t worry, though, the default interest rate was 17.5%…
I think the rules are state specific as to what happens to the property in a foreclosure proceeding like this. There is stuff all over the internet about it, but nothing authoritative except one out of state case that said, in effect, the holder of a junior lien can foreclose all he wants, but if the homeowner keeps paying on the senior liens, nothing happens. No sale, no due on sale trigger, etc.
That tells me, at least in that state (not CA), that no sale gets forced because of a junior foreclosure (though there is some info out there that indicates that’s what happens), the second can’t move in and take over payments, the holder of the junior liens does not assume the senior liens, etc.
Your mileage may vary.
The case is the last half of this page:
http://www.mortgage-investments.com/Investment_in_mortgages/mortgage_foreclosure_law.htm
^Thanks for posting the lawsuit. Looks like the tenants are named in the complaint as well. Which is why I would never touch a distressed property like this with a 10 foot poll, at any price and under any circumstances.
Which reminds me, I will always have somewhat of a soft spot for this property since googling the address after it came up on cleanoffer was how I originally discovered socketsite 🙂
That’s very interesting EBGuy. This doesn’t explain any of the odd occurrences in November and December of 2008 where the property appears to have been sold and then granted back by a known con artist because the lease was from December 1, 2009 to October 31, 2010, but it looks like the owner was pretty desperate if he got a 13.5% loan, tried a weird financing scheme, and then rented the property and didn’t remit the rents. If the allegations are correct, he also committed fraud.
As I noted in a previous thread, the (former) owner also lost 200 Funston to foreclosure in 2008. (Bought for $1.2million in 2006 and ultimately sold by the bank for $910k in July, 2009). Countrywide financing on that one…
Gosh, this stuff is complex. Remind me to never get near a courthouse steps auction after an ether and absinthe binge.
But if I do, could a numskull like me avoid a huge mistake by hiring a title company to figure out the active liens ? Then so long as :
bid_price < property_value – (total_of_liens + estimated_legal_costs + other_assorted_costs)
am I on my way to being a real estate genius ?
Wow. Crazy story. I actually called on this place a long time ago and the owner offered to rent it prepaid for 6mo. LOL.
“except one out of state case that said, in effect, the holder of a junior lien can foreclose all he wants, but if the homeowner keeps paying on the senior liens, nothing happens. No sale, no due on sale trigger, etc.”
Did you read the notes at the top?
“In this case the property owner had a first and a second mortgage. They continued to make on the first mortgage but not on the second. The second mortgage lender foreclosed. The Gary H. Watts Realty Company bought the property in the foreclosure sale.”
The respondent-appellee is the new owner, and the petitioner-appellant is the first mortgagee who is trying to foreclose on the new owner.
tipster, you simply misread that case. First of all, this is about application of a due-on-sale clause, which I mentioned above, and whether foreclosure of a second mortgage triggers due-on-sale. Second, this property was foreclosed already and was already owned by a new owner who purchased it at the foreclosure sale of the second mortgage, subject to the first mortgage. The first mortgagee was then trying to foreclose on its mortgage because it thought the due-on-sale clause was triggered by the foreclosure sale. The judges disagreed that the clause was triggered, because they determined that the contractual language was such that it permitted a second mortgagee to foreclose. An interesting additional finding is that the judges determined that this is not a sale by borrower because the Mecklenburg County court clerk effected the sale.
This is how foreclosure is supposed to work. Senior liens continue to be active and junior liens are extinguished.
If for some odd reason, you had an unsubordinated senior lease and a junior mortgage, and the mortgagee foreclosed, then the new purchaser would take the property subject to the lessee because the lease is senior.
Milkshake, that is the “genius formula,” but in practice it’s hard to implement because other informed bidders are usually bidding against you.
Of course, you could have the case in the Wells Fargo foreclosure in the SFGate.com article referenced by our illustrious editor, where the bidders did not properly inform themselves. Or rather they informed themselves and then ignored the information. What Wells Fargo did in that case was due to sharp thinking by their attorney, but there’s no way they could have predicted that an uninformed buyer would interject like that.
You definitely need to learn about the chain of title when dealing with foreclosure sales.
Read the cases again.
First case:foreclosing second cannot take over payments to the first.
Second case:if original property owner keeps making payments to the first, foreclosing second can’t do anything and neither can the first.
The” bought the property” part is in the summary sloppily written by the blogger, not part of the case. If that had occurred, the original owner wouldn’t keep making the payments.
tipster, you’re simply not reading correctly, and you don’t seem to understand foreclosure at all. A foreclosure is a sale of a property. Full stop. Read up on the law and try again. Neither of the cases you reference are on point.
For the 1st case, according to the description given, the new owner was the 2nd mortgagee because the 2nd mortgagee foreclosed. The 2nd mortgagee tried to pay the 1st mortgagee as the new owner, and the 1st mortgagee then foreclosed. I would prefer that you pull the actual case if you’re going to continue to make an argument based on Barnes, because I read a summarizing statement elsewhere which suggested that the 1st mortgagee waived acceleration by accepting payment from the 2nd mortgagee, which directly contradicts what this summary says.
For the 2nd case, look at the case caption:
“In the Matter of the Foreclosure of the Deed of Trust of FERDINAND RUEPP and BILLIE LEE RUEPP, Grantors, TO LARRY W. BYRD, Trustee, as recorded in Book 4230 at Page 48 of the Mecklenburg Public Registry.”
The prior owner were the Ruepps. Then look at the list of attorneys:
“Manning, Fulton and Skinner, by Charles L. Fulton, and E. Fred McPhail, for Columbus Mutual Life Insurance Company, petitioner-appellant. Kenneth W. Parsons, for Gary H. Watts Realty Company, respondent-appellee.”
The respondent is the new owner who bought it at the foreclosure sale, Gary H. Watts Realty Company. The petitioner is the first mortgagee. This case is about whether due-on-sale is triggered by a new owner by foreclosure sale. The key point is that there was a new owner.
Btw, there is also the concept of “strict foreclosure” in Connecticut and Vermont. The way this is different from judicial foreclosure or foreclosure by deed of trust is that in strict foreclosure, there’s no sale, but the mortgagee takes the property without sale.
If there is significant equity in the property, a judge will usually require a sale so as not to clog the equity of redemption and for general fairness.
This is not very common because it’s typically an unfair remedy, but the doctrine does exist. Historically, strict foreclosure was an appropriate remedy for “installment land contracts,” but in recent times many courts, except in certain Midwestern states, will treat installment land contracts like mortgages.
Thanks for checking my work sfrenegade. As for competing with other bidders who also have the formula the competitive edge is in the ability to accurately calculate property_value and to a lesser extent some of the predicted costs.
And for property_value the trick would be to have developer or flipper instinct to know what key improvements or changes could increase the market value greater than the cost of those changes. That’s almost a separate issue since it applies to normal sales too, but with cases like this it seems to be tightly linked in to the “deal”.
After the 20th reread, I agree with your assessment, SFR. If there was no sale, the court could have just said there was no sale of the property, so there must have been a sale. The description threw me: the owner stopped making payments only on the second, not the first and the second foreclosed. Why on earth would the owner make payments in that fashion. If the second can foreclose and own the property, stop making payments on all of the loans!
If there was no sale in the first case, the second would not have started making the payments. However, it was bizarre that the first didn’t have to accept them in that case. “You now owe the property: prepare to get foreclosed by the first”
As your resident architect I have to say this: Anyone else notice the odd, ugly little facade?
The twin arches have an odd curve to them; crashing into a center column then diving awkwardly to the ground.
The “coach lamps” appear to be Colonial Williams-burg. The steel railing tries to be (sort of) Spanish. The casement windows are a modified Craftsman style..and the worst piece: the odd shaped gable roof line over the curved bay that is partly cut off on one side. The entry door and garage door appear to be Mission style, with some gratuitous mission clay tile at the roof edge.
Terribly confusing image; not very cohesive.
This concludes your architectural commentary for today.
UPDATE: Let’s see if we can’t pull a few things together and clear a few things up.
3271 Baker was purchased in November 2006 for $1,700,000 by way of a $1,000,000 first and $425,000 second courtesy of Countrywide which would suggest $275,000 of the buyer’s cash was involved at the time.
A third mortgage in the amount of $425,000 was written by Pacific Equity Capital in October 2007 (which was then assigned by PEC to three individuals) and the property was subsequently remodeled.
In July 2008 the remodeled 3271 Baker returned to the market listed for $3,395,000 (a list price which was subsequently sliced, diced and chronicled on this site). And in August 2009 with the note in default and $495,231 owed (principal, interest, and fees), the holders of the third mortgage filed to foreclose (enter a failed bankruptcy bid on the part of the owner).
Unable to successfully negotiate a short sale having reduced the list price down to $1,895,000 this past June, yesterday the third mortgage successfully foreclosed on the property with a winning bid of “$61,000” on the courthouse steps. The foreclosure effectively extinguishes the third mortgage and the underwriters of the third now own the property subject to the terms of the first and second mortgages and their balances due.
As a couple of plugged-in readers correctly noted (and we originally screwed up in a since redacted note), as both the foreclosing lender and winning bidder, the third mortgage holders have effectively invested $425,000 plus forgone interest and fees in the property to date, the $61,000 bid was essentially a pass through.
And as a plugged-in “EBGuy” digs up, there’s even more going on behind the scenes.
noearch – I noticed the exact same thing though was too embroiled in the Confuse a Cat dealings on the loans.
I see those poorly executed arches often on stucco facades. The line just doesn’t fit into a classic spline curve. I believe that the upper structure of this curved arch was made from a bent piece of plywood and the two vertical sides are straight. The stucco worker attempted to fill in the spline but there’s only so far you can go with just stucco if the form is wonky.
My other beef is that rosette in the upper left. That’s a stock item and is becoming cliche. Whenever I see that it reads “We had this empty wall space and needed to liven it up, so we tacked in this $48 stucco form from the catalog to fill it in.”
“The description threw me: the owner stopped making payments only on the second, not the first and the second foreclosed. Why on earth would the owner make payments in that fashion. If the second can foreclose and own the property, stop making payments on all of the loans!”
This would only make sense in the rare case that the 1st mortgagee will sees that you are in good standing and offers to buy out the 2nd mortgagee because you are a good customer. For the 1st mortgagee, this eliminates the risk that the 2nd mortgagee forecloses resulting in a new buyer who may not be creditworthy. Because the terms of your 1st mortgage are typically better than the terms of the 2nd mortgage, this may be advantageous to you.
You can’t game the right of redemption (where a foreclosee is permitted to repurchase his/her house) this way, so I don’t think it’s helpful for that.
Reding this I get the impression any buyer, even one with with no credit can foreclosure upon a third note and acquire title and rights to pay the first and second loans? That does not add up.
“Reding[sic] this I get the impression any buyer, even one with with no credit can foreclosure upon a third note and acquire title and rights to pay the first and second loans? That does not add up.”
In those cases, the 1st and 2nd mortgagee would probably attempt to use the due-on-sale clause that is standard in any mortgage that uses the Fannie/Freddie standard language in order to call in the loan:
If all or any part of the Property or any interest in it is sold or transferred (or if a beneficial interest in Borrower is sold or transferred and Borrower is not a natural person) without Lender’s prior written consent, Lender may, at its option, require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if exercise is prohibited by federal law as of the date of this Security Instrument.
If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is delivered or mailed within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on Borrower.”
It’s important to note that this language is slightly different from the language in the North Carolina court case that tipster linked to above, because that due-on-sale clause was written before the Garn Act (passed in 1982, judgment was entered in 1983, but it looks like the pre-Garn language), while this one was written after. Any rulings on the pre-Garn Act language may not necessarily apply to post-Garn Act language, as the Garn Act blesses due-on-sale clauses.
awesome to get this info from a pro. especially awesome to have the pro slap around the slap dash musings/conjectures of the so-called ‘tipster’.
informative discussion.
i did not see this auction listed in advance in the ususal spots that i see most auctions posted. anyone know where it was disclosed?
i’d guess the market value of the home in its existing condition is around 1.7. great location, crappy remodel. why hasn’t paul huang chimed in?
Very complicated transaction. I’m still going to sell it!
The successful bidders (holders of the 3rd) were at the sale and reportedly were going to bid it up to 400k to protect their interests. We don’t know how much they paid Pacific Equity, they could come out OK when the property is sold.
“Why on earth would the owner make payments in that fashion. If the second can foreclose and own the property, stop making payments on all of the loans!”
I could see that strategy (stop paying on 2nd, keep paying on 1st) be viable if the home is so far underwater that there is zero equity available for the 2nd mortgage holder to capture by foreclosing, but the owner still wishes to stay in the home for longer. If the 2nd mortgage were to foreclose and end up with a property that has a 1st mortgage that is still worth more then the property, what incentive is there for the 2nd mortgage holder to foreclose? So an underwater home “owner” could in effect play chicken with the 2nd mortgage holder, just stop making payments and see if they are willing to incur the legal expenses required to foreclose and still end up with nothing as they would then get wiped out by the 1st foreclosing.
So if the 2nd doesn’t foreclose, the ‘owner’ can continue making payments just on the 1st until such time as they decided to default on the 1st or the home value recovers enough that the 2nd mortgage holder feels that they can recover some of their money by foreclosing. I could see it where the 1st is an interest only loan at a decent rate so that the total costs of the ‘owner’ are comparable to rent after removing the costs associated with paying the 2nd.
@sfrenegade
So, in essence, the third mortgage holder is fairly screwed either way, because the first and second mortgage holders can call in the entire loan immediately now?
What’s the play the 3rd mortgage holder is trying to make? Buying the property and hoping to hold it long enough to turn a profit? The home would have to sell for 2 million in order for the mortgage holder to come out ahead.
“So, in essence, the third mortgage holder is fairly screwed either way, because the first and second mortgage holders can call in the entire loan immediately now?”
Not necessarily. We’re talking about a solvent party buying from an insolvent party, so the bank might be happy about the new owners taking over the loans and actually paying them on time. Also, it’s entirely possible that the loans are at above-market rates because the prior owner was likely unable to refi (which is why he took a 3rd mortgage at 13.5%), so the bank might be comfortable leaving it alone for that reason too.
“What’s the play the 3rd mortgage holder is trying to make?”
Trying to get more than $60K collected on their $486K note. Also, as formerly%whatever said: “We don’t know how much they paid Pacific Equity, they could come out OK when the property is sold.” If the new owners paid at 50 cents on the dollar for an original $425K note, they could try to get $200K and call it a day. In that case, the house would only need to sell for $1.625M.
“What’s the play the 3rd mortgage holder is trying to make?”
Could the third believes real estate prices will continue to decline until the value of the home above the first and second mortgages was zero? So by taking the lead and selling now, they at least get more out this week than next week.
I also assume there are penalties that the first and second were accruing every month that the owner didn’t pay, that essentially the third would be paying if they didn’t sell it off ASAP.
We don’t know how much they paid Pacific Equity, they could come out OK when the property is sold.
The assignment of the third from PEC to three individuals was within days of the note being written, we’d be willing to bet it was effectively done at par (if not a premium, did you see those rates?) plus fees versus any discount.
Accleration clauses are pretty standard fare in trsut deeds used in San Francisco. It’s rare to have an assumable note, sometimes they pop up in is it VA Loans (?) and often in group TIC notes were you are often swapping out on partner on a note. Or am I misinformed?
Perhaps the seller was making payments on the first in hopes of a successful short sale.
I’m wondering why the owner being foreclosed upon didn’t come to the courthouse steps with a big bag of cash and bid as high as he could. Suppose he brings $200K. If he loses, someone else paid $201K and now he owes $468K-$201K = $267K, and he gets to keep his $200K. If he wins, well, he would probably have had to pay it anyway eventually.
If I’m right, it would have been a very interesting game between the 3rd mortgage holders and the owner.
“Accleration clauses are pretty standard fare in trsut deeds used in San Francisco. It’s rare to have an assumable note, sometimes they pop up in is it VA Loans (?) and often in group TIC notes were you are often swapping out on partner on a note.”
Due-on-sale clauses, which allow the bank to accelerate upon an unpermitted transfer, are extremely common on almost all mortgages because they are specifically allowed under the Garn Act. Nonetheless, if someone is a good credit risk, the bank can waive acceleration even though the due-on-sale clause permits it to accelerate. You are correct that very few loans these days are assumable without consent of the bank.
In addition to the reasons I mentioned above, in this case, it doesn’t seem like BofA/Countrywide (the 1st mortgagee and 2nd mortgagee according to the editor) has that much incentive to foreclose, since the 3rd mortgagee is already doing all the work, and it looks like the house could sell for more than $1.425M.
The standard due-on-sale clause I posted above is from FNMA (Fannie)/FHLMC (Freddie) loans, so you would probably see it in VA and FHA (which are GNMA aka Ginnie Mae) loans as well.
“If I’m right, it would have been a very interesting game between the 3rd mortgage holders and the owner.”
You’re not right. 🙂 This would be completely uninteresting because the 3rd mortgagee would simply have bid the house up to the value of their debt (in this case, $486K) if they needed to.
You are correct that if a 3rd party had entered the bidding that the owner could owe less on a deficiency judgment. But why would the owner bidding $200K cause a 3rd party to bid $201K? The only 3rd party that would have done that here is the 3rd mortgagee. No one else was willing to bid more than $60K.
sfrenegade: I don’t get it… It still seems to me that the owner (pre-foreclosure) benefits from the price being as high as possible, as it reduces his debt (as long as he’s not the winning bidder, and even then he’s break-even minus transaction costs). Even if the 3rd mortgage holder is the one with the winning bid, isn’t the amount of his debt accordingly reduced? The amount of debt satisfied by the sale doesn’t depend on who the winner is, does it?
I’m a little foggy on this stuff – thanks for your helpful comments…
It does depend on who the winner is. When the foreclosing mortgagee makes a bid, it is called a credit bid, and they don’t have to pay it to themselves. Only if the money comes from someone other than the lender is it used to pay down the note, and any remainder could be subject to a deficiency judgment.
Otherwise, it would be ridiculously easy for foreclosees to game the system, and the law typically wouldn’t allow such an unfair result.
The other interesting thing is that if you win your own house, all of the liens reattach. If the 1st mortgagee had foreclosed, and the owner bid on his own house and won, the 2nd and 3rd mortgages would reattach and not be wiped out. Again, this has to do with not having unfair results.
The only person who’s typically not allowed to bid on the house is the trustee on a deed of trust.
I still hate the arches.
sfrenegade: Thanks again; I think I now understand your points about the 3rd mortgage foreclosure.
Following up on your comment about the liens reattaching, is it possible to have a friend act as a proxy and bid (using your money) on a first mortgage, extinguishing the 2nd and 3rd, and then transfer it back to you?
Such a simple thing is starting to seem wondrously complex to me now…