Second Mortgage Notes For < 1 cent on the Dollar

Posted on November 3rd, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

A good friend who specializes in distressed real estate assets such as notes and REO just bought 27 second mortgages with a face value of $2,153,400 for $2400 – that’s TWO THOUSAND FOUR HUNDRED DOLLARS.

He does a lot of business with the bank seller and this package was in addition to a 12 unit REO package he bought for 36 cents on the new appraised value.  Even though this is an exceptional deal, it is not too far off of the 5 cents on the dollar that Bernanke testified about when selling TARP to the House.

None of the first mortgages ahead of these seconds have a Notice-of-Default against them. Two of the seconds totaling $54,275 are current, paying on time.

The most interesting is a $540k second in Jersey Shore.  The home was purchased for $1.8 million with the first mortgage being $800k.  The current appraised value is $1.2 million.  My friend can actually foreclose on the property and make a killing or just offer the owner a buy out of $50k on the $540k second, make a 2000% return and get the other 26 notes for free.

I wonder at what level the banks holding hundreds of billions of these have delinquent home equity loans valued? -Best Mr Mortgage

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37 Responses to “Second Mortgage Notes For < 1 cent on the Dollar”

  1. No offense but what is your friend NOT telling you.

  2. I am having a very hard time believing that any bank would sell a performing note for that price….wouldnt make any sense at all.

  3. How does he make a killing foreclosing on a 1.2mil house with a $800k first mortgage. Not sure I follow that one.

  4. Sounds like the diamond business. Buy the whole lot or forget it. So there are some gems out there.

  5. Wouldn’t that be .1 cents on the dollar?

  6. Oops – its <1 cent on the dollar.

  7. If they are selling 2nd mortgages for .01 to .05 on the dollar–then why not reduce it for the homeowner? Kicking people out of their homes is horrendous for the community and if the banks are going to take a bath anyway, why not give the homeowner the break? After all, they’re the ones that have been paying on it.

    This should be illegal. The first people that should be offered these discounts are the actually obligors–not some leftover mortgage/real estate vultures.

  8. banks have not filed a notice of default on 2nd mortgages in months. These are essentially unsecured credit cards that you don’t have to pay.

  9. “He does a lot of business with the bank seller…”

    So, How much business does one need to do with that bank? or, Is a deal like this available to a pre-selected group of investors? How many of these bulk (27 is bulk?) deals are available?

    I have to agree with Skeptic in Denver and Lisa.


  10. cobalt-
    cause he paid $2400 for a 2nd mortgage worth $400k. If the first mortgage is defaulted on, the bank will sell the house for ~1.2M. Once they get their $800k, the leftovers ($400k) will be his.

  11. There are actually some of us out there going to REO auctions and making contact, that have this level of money to throw away. Why hasn’t anyone contacted u? I’m surprised my Banker hasn’t pulled me to the side. I’m sitting on all cash and Bonds….something is fishy….???

  12. A bank would never sell a performing note at such a deep discount. NON perfoming….could be, but they’re not walking away from good pay loans….seems fishy?

  13. OK… Mr Mortgage asked me to answer a few questions on this deal… I am the one that bought it.

    The deal was 9 non-performing 1st 2 performing 1st and 27 seconds. None of the seconds are attached to any of the 1st. The 11 1sts were bought for $655,000 and the 27 seconds were bought $2400 as a tag along transaction to the 1st. and yes 2 of the 2nds are current never late with total face value on just those 2 loans of $54k.

    Cobalt– I can foreclose on the 2nd, pay off the 1st and keep the balance of the proceeds. It is a vacation home so nobody is moving… if the existing seller wants to sell the house himself i will accept a huge discount in payoff and he can pocket some money instead of getting nothing if i foreclose. I will give him the choice but it will be up to him.

    Lisa– what should have been illegal is the way these borrowers lied about their ability to repay the mortgage. That said, I give every homeowner the opportunity to keep the house if they can show an ability to pay a monthly payment. Most of the 1st mortgages have already gone through my review process for resolution. Of the 9 defaulted loans 7 will most likely keep their homes. I will reduce the loan balance to the fair market value of their house and forgive the overage loan balance. Net result will be millions of dollars in debt restructure and homeowners saved from foreclosure… that is how this “vulture” sleeps at night. Frankly, I am pretty sure ACORN will be cheering all the way from Ohio.

    Tim– The deal was available through a qualified bidding process. 7 bids were received with my bid being top bid.

    This was a very small pool and not typical… think of it as loose ends that had fallen out for one reason or another of larger bid pools. It is very unusual to see a deal this small normally this discount level is seen over in loan pools with a take down over 30 million.

    Hope this clears a few things up.

  14. MM Friend,
    Thanks for the additional info. I hope the deal works in your favor. I’m still doubtful of this one. Can’t believe top bid of 7 wins at $2400.

  15. Mr. Mortgage Friend, what is the true mark to market value of the (11) first? You paid $655,000.00 for them, but you did not tell us what thier true value is (which the lender that sold them also knows). Can you please clarify that figure for us?


  16. I’m a bit skeptical

    BUT everyone needs to realize that if for any reason the first lien loan triggers or ends in foreclosure then the 2nd lien (most likely) will get nothing back making that penny look pretty good in the end

    You also have to realize that there are people out there that will make their 2nd lien payment and skip the first (because the first is to big to be paid (the make what you can pymt mentality)) so while the 2nd looks like a performing asset, it’s worthless in foreclosure.

    Still I would be very skeptical of what the other bidders knew that made them balk at even .01 on the dollar.

  17. Milstar – remember, if the second was not a purchase money loan there is recourse and MrMortgageFriend can attach them personally. Either way, second mortgages are a gamble but they can pay big. Even though his deal was exceptional you can buy seconds for 5-10 cents in bulk all day long.

  18. True market on the uderlying assets of 1st $1,825,000.. very conservative valuation. the unpaid balance of the underlying 1st loans is $3,280,017 The seconds are absolutley a home run at this price for someone that knows how to extract the value from this type of asset.

    the core of the bid was the 1st liens and that is were the main bid price was driven. The seconds are an after thought… Because of my background and the valuation processes i have developed i am very confident in my bid strategy. 3 hours after closing this deal i received an all cash short sale offer of $330,000 on an asset i paid and bid at $78,400. Net after commissions is about $310k. So i think this deal is going to work out regardless of the outcome on the 2nds. best of all their are 7 people that will be getting a second chance at home ownership.

  19. OK – So your saying your initial investment of $655,000.00 bought you $1,825,000.00 from a lender PLUS you received the seconds for basically nothing (throw ins). That is pretty impresive and I am some what shocked your bid was the best given that much money was on the table, but be that as it may. You got a once in a lifetime deal by the looks of it and I would suggest this is not common at all.

    You stated you will write down (7) loans at mllions of dollars in debt restructure. You only have 1,170,000.00 to play with here so your debt restructuring can’t be too big. Say you redo each loan at a reduced value of $170,000.00 then you just gave away all of your hoped for profit. Now you could get lucky on the seconds, but that is not likely. Even still millions in write downs is simply not happening, so what gives here? What am I missing?

    Milstar, nobody that has any intelligence pays their second and not thir first. A second cannot foreclose so what would be the point of that other then throwing your money away? If you can’t afford your first your going to lose your home so why throw away money on your second? Doesn’t happen…

  20. Mr. M. I would suggest that most seconds were purchase, but I could be wrong. Even still I would also suggest most seconds that were not purchase were subprime and you can’t get blood from a stone so they just write them down. Rarely do people pay seconds and those that have blood hounds on them typically get a pittance in a pay program ($100 per month for 50 Years) or something silly like that. Not worth the legal bills to get to that point. Unless you know otherwise that would be my experience…

  21. Stu– you have to calculate the debt reduction from the actual loan balances that were totaled $3.2 million

    Cutting loan balances to the actual asset values and forgiving the remaining debt waives over $1.5 million in debt and retains the 1.7 million in value against a $655k cost leaves $1,050,000 profit. But teaching a math class was not why i agreed to address the quetions asked here. In the past 12 mnonths i have negotiated hundreds of millions in bulk loan purchases and REO buys. This deal was good but it is small and unique and by no means the cheapest deal that is being done. I think the whole point of Mr Mortgage bringing up the 2nds is to illistrate just how little value these loans have on the street. the bank had tried numerous times to sell the 2nd loans without success. a bid on the 2nds was required as part of the bid on the 1st morgages. As stand alones i would still buy them and before it it is over i will negotiate a nice return out of the 2nds…

  22. admin Said:
    November 3rd, 2008 4:50 pm

    banks have not filed a notice of default on 2nd mortgages in months. These are essentially unsecured credit cards that you don’t have to pay.

    guess what!! My bank filed a notice of default on the second, but not the first. About 2 weeks ago. Go figure.

  23. stu– i don’t know who told you a 2nd can not foreclose…. but that is bad info… 2nds can and often do foreclose when it there is a chance for capital recovery. The Jersy shore loan makes sense as a FC… the process could result in recovery of hundreds of thousands of dollars. It is the most intresting loan of all the seconds and in my opinion it will yeild 20 times the street value of the performing 2nds

  24. Your friend is not telling you the whole story, first and for the record an appraisal in an opinion and in extreme markets they are worthless, your house is worth what another person is willing to pay for it and in this depression like market demand is extremely low, homes with values over $400K are vulnerable especially when 2009/2010 will be an absolute bloodbath for mortgage business and depreciating values, what sounds like an outstanding 2000% return on your money will be more like a $2400 loss but it was worth the risk that’s the chance you take when you go for the home run. I also doubt these where AAA rated mortgages they don’t get sold to pawn shop owners just to unload them I don’t think that $2400 cash flow is going to prevent anybody from going out of business on especially on preforming loans it doesn’t make any sense.

  25. Mr Mortgage Freind,
    Thanks for all the info. Can you tell us what kind of qualified bidding process it is, and how to get into such bidding process? I am intrigued and interested.


  26. How can i get my hands on a deal like this. How do i get a hold of someone for more information.

  27. I have to agree with Mr. M Friend… I own 2nds in the past and foreclosed on it all day all.

  28. If you are able to make these trades, why arent the banks? In other words all of the bailout, not rescue package, money is going to you and opportunist like yourself. Not taking anything away from you, I wish I had the knowledge and acess to enrich myself too. But,if the banks would configure these types of deals they wouldnt need my tax dollars. In fact they could even hire some people to work these things out, albeit on a temporary basis, which would improve employment for of of those unemployed real estate people.

  29. The 2’nds if foreclosed on only get their money if there is any left after paying off the first. A 2’nd cannot collect until the first lien is satisfied. Going under the assumption that these are foreclosures or future foreclosures due to LTV issues and price corrections a 2’nd will not get a dime so why on earth would you file the paperwork and pay the fees to close when you are just tossing money out the window. You will never get .01 for any of these unless the value is high enough to pay off the first and then you get whatever is left. In that case the home could be sold for profit so again the paper is good paper and lenders hold onto them with tight fist. I may be wrong here but I have not heard of any 2’nds making a .01 of late which to Mr. Mortgages point is why they don’t do it any longer except perhaps in rare instances where maybe the same lender hold both papers and the homeowner simply cannot find a buyer to take the property off of their hands in time due to medical or job loss etc.

    Also you said you were going to re-write millions of loans and I still do not see where this millions is coming from. I get you will make some cash but not nearly enough profit is here to write down millions of dollars to give away to homeowners to keep their homes and still make any profit for yourself. What would you do then hold the notes to maturity? It doesn’t sound like you are in the business of playing banker… maybe I am wrong on that?

  30. Jersey Shore loan aside which I still can’t believe the ignorance of the lender to give that away in these times, but you obviously got lucky on that one. They must have not noticed it in the package would be my guess I suppose…

    To clarify what you said:

    To clarify for all you said:

    I will reduce the loan balance to the fair market value of their house and forgive the overage loan balance. Net result will be millions of dollars in debt restructure and homeowners saved from foreclosure…

    I am not knit picking and do not mean to question what it is your doing, but again where are the millions coming from. The whole package is $3.2M and written down it some out to $1.7M and with $655K yours their just isn’t enough to do millions of write downs here. Maybe you meant to say you would write down just over $1M perhaps and get your money back? Then your only profit would come strictly from the Jersey shore home and any other seconds you may be able to collect on. That makes sense and you still walk with a couple of hundred thousand in profits… and were a real nice guy to those 7 homeowners.

  31. I actually find this story credible because as some have stressed – these are SECOND position liens. In todays market, they really are or could be close to worthless.

    Say for example, a guy has a first for 500K on a house that is worth 300K. If he owes me money (say 100K), is it really worthwhile for me to file a second deed of trust when he is so underwater to begin with? Depending upon the severity of the market, and how underwater the person is, I may decide its not even worth the $40.00 filing fee.

    Again, if this was first mortgages, Mr. Mortgage was talking about I would be the first one to call BS as to this story. However, seconds really is a whole different animal – this really does sound plausible to me.

  32. I totally agree with the story as well Anti, but I was more questioning the goodness in the heart of the buyer, and just trying to make sure his response is on the up and up.

    In these times we do not want to mis-lead people into thinking this deal is the norm for example, because then they go get a deal full of seconds and realize their all worthless as most are in this market. If CA is down 41% in value I summize that virtually no seconds for sale are worth anything and they would be giving them away.

    This particular deal is sweet to be sure and he will make some good money on it, but again that Jersey Shore property was basically what made that deal.

    I am getting off of my soap box on this topic because it is what it is…

  33. Stu — you are having some serious trouble with your calculator. Unpaid loan balance is $3.2 actual asset value $1.7 Cost $655k The write down from 3.2 in debt to the 1.7 in value is the debt restructure to the consumer. After refinance and short sale proceeds of 1.7 leaves a profit of over $1 million Then there comes the seconds… without going into detail it is absolutley accepted some are worthless but since we are talking about Jersey… the house today has a 5 sale liqidation value of 1.3 million in todays depressed market. 1st balance is 800k. looks like 500k in upside there less costs… my goal is to find 200k in there. — before you start in telling me i can’t sell the jersey house at 1.3 you should know that i sold nearly 100 houses last month alone…. so i am feeling pretty good about my teams ability to sell houses in this market

    Also– i do my own internal valuation process on every asset i buy. don’t confuse what i do to establish value as a traditional appraisal. The only thing my process has in common with an appraisal is the property address.

    As for why the banks do not do this themselves… there are too many reasons to get into here… but i will just say these deals get done everyday. I am a long ways from making any meaningful return on the seconds but you can be sure the $2400 bet was a good one.

    Anyway folks… I think your questions are answered per Mr Mortgage’s request. Be sure to get and vote today!

  34. Thank you for sharing and bringing the experience of your latest deal to the table for us to share in. I do appreciate that and like to play devils advocate at times to keep everything on the up and up. Too many out there today are looking for the next deal or victim and it is refreshing to see that some, such as yourself it appears, are making a difference and are not all about screwing the next guy.

    Thanks again and good luck to you!!!

  35. […] “A good friend who specializes in distressed real estate assets such as notes and REO just bought 27 second mortgages with a face value of $2,153,400 million for $2400 – that’s TWO THOUSAND FOUR HUNDRED DOLLARS.” Full Article Here […]

  36. Is it possible for a homeowner who is upside down on their home who has a first and a second to purchase the 2nd note for pennies on the dollar themselves or through a business to bring them back above water?
    For instance if I owed $200K on a first and another $100K on a 2nd and the property values at $250K could I buy the 2nd for $10K to $30K and reduce my debt to below its current value? If this is possible what is the percentage of the face value one should expect to have to pay for a 2nd mortgage in Florida right now?

  37. That is great.

    I will like to be put in contact with your friend. I am interested in buying non performing 2nds myself. Please can you pass the message on?


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