Does first lien holder care if I pay off 2nd's? - Posted by Jerry in Illinois

Posted by Jerry in Illinois on January 20, 2005 at 15:25:06:

Thanks, Elizabeth.
ARV about $145K. rehab about $10K. First is telling me HUD must “NET” $107K, but won’t tell me if that means a HUD-1 sheet with no liens and a contract price of $107K or what. The first 2nd is the HOA for about $2K. The second 2nd is a forgiveable loan from the employer for $3K. I’m willing to take care of those if I get a commitment letter, which the lender has refused to do. I don’t know if it’s because they’re inexperienced or sharp. Monday, I even faxed the lender’s rep copies of two commitment letters from previous deals, one a HUD loan, just to show her that it IS DONE THAT WAY SOMETIMES. The auction is scheduled for March. It just doesn’t seem that the stakes in these two tiny 2nd’s are high enough for the lender to hold me up like this.

Does first lien holder care if I pay off 2nd’s? - Posted by Jerry in Illinois

Posted by Jerry in Illinois on January 20, 2005 at 13:18:31:

I recently posted a problem I’m having with a 1st lender giving me grief by insisting I pay off the 2nd’s before they’ll give me assurances of a short-sale. In the past, I know that I’ve had to pay off the 2nd’s at closing, but they want me to do it BEFORE closing. Someone posted an answer that the 1st lender is trying to get me to “pay off the 2nd’s for them”. I don’t get it. How do they profit or benefit if I pay off the 2nd’s and then not get my short-sale? If they proceed to auction, the 2nd’s get wiped out anyway, no?

Can anyone give me some clarification on this?
Jerry in Illinois

Shorting 1st - Posted by Elizabeth (NJ)

Posted by Elizabeth (NJ) on January 20, 2005 at 15:12:19:

It’s very clear. Your paying off the 2nd before closing just nets the 1st a larger profit margin, not you. They can tie you up in negotiations for a long time if you give them the power to do so.

And yes, sometimes the 2nd gets wiped out at action sale, but not always. Depends on the jurisdiction and how loudly the 2nd complains. If there’s a large enough profit margin for the 1st at auction, the 2nd may have a legal right to argue that the 1st was “oversecured” and that the 2nd should have shared in the profit at auction.

Is there an auction scheduled on this property? If so, you probably have other options you may not have considered.

I’m curious as to how badly you want this property and how accurate your numbers for FMV are.

Why not come in thru the back door & short the 2nd and take an assignment of the 2nd? Taking the assignment gives you a role in this scenario. In Nov. I shorted a loan from $110,000 to $15,000, then took an assignment of the $15,000 lien, sold the property at a good profit and discharged the lien at closing.

By the way, who’s the lender on the 1st? Some lenders have bad reputations for this kind of deal.

If you want to email me off the site, I might have some information for you.

Good luck.

Re: Does first lien holder care if I pay off 2nd’s - Posted by Randy (SD)

Posted by Randy (SD) on January 20, 2005 at 13:25:51:

No way I would pay off the second before closing! How would the first benefit? Very easily, if you pay off the second lien they do not have to foreclose to wipe it out they are now free to sell for the amount owed on their first lien. As someone posted when you initially posted this problem, they have no further incentive to deal with you when you have paid off the other underlying liens.