The Wonderful World Of Second Mortgage Investing.

Today I will take a moment to dust some cobwebs out and hope to shed some light on a subject that has many home owners and some investors a bit confused.  I first would like to say that foreclosing on a property is the absolute last resort of NSIG.  We go to great lengths to help homeowners stay in their homes, however we do run a business and sometimes foreclosure is inevitable.  Now with that bit of housekeeping out of the way.  Let me tell you about a recent conversion I had with a home owner. The homeowner was under the impression that a second mortgage was somehow a lesser mortgage to the first as far as its rights and ability to hold property as security.  This homeowner was extremely inquisitive so i basically explained to them everything that I knew about 2nd mortgages.  When I was done the homeowner wanted to invest into 2nds with me but didn’t have any money.  I first explained that under the British common law the concept of “first in time, first in line” came to represent why mortgages were called 1st, 2nds and so on.  That was only a representation of WHEN the mortgage was recorded in comparison to WHEN the sale took place.  With that bit of truth I then explained that the 2nd mortgage had essentially the same verbiage as a first in that the mortgage was the security for the note and it reflected the property as being the security.  They rebutted me and said that the second was lesser in power than the 1st, I then explained that the 2nd mortgage was ONLY second to the first when it came to PAYOUTS and NOT when it came to legal power.  I said that the reason that you don’t hear much about a 2nd mortgage foreclosing is because if there is no or little equity in the property and nobody buys that property at the foreclosure sale, that the second mortgage holder would get the property on a CREDIT bid and would own it “subject to” the first mortgage debt.  Since this kind of investing takes a few extra moments of due diligence when reviewing the file.  Most investors just skip on these kind of deals. I then stepped up to the plate and hit my point home.  When an experienced investor looks at buying non performing 2nds they will see if they get the property back on a credit bid.  Can they rent the property out for more than is owed on the first.  Here lies the idea of a 2nd mortgage having more power than a 1st. Lets say that Joe investor knows that if the homeowner won’t work something out that they can foreclose on the property, and one of the following things will happen.

1. A third party will come and pay that price at auction and then joe gets the amount that he listed the property to be sold at. (the new buyer takes the property subject to the first mortgage.
2. The 1st position comes in and for what ever reason, they want to protect their interest and they make a bid on the property and Joe investor walks away with that $$ amount and smiles all the way to the bank. (very unlikely)
3. Joe gets the property back and now has an REO.  Joe can do a short sale, contact the 1st and request a payoff that is lesser than what is owed.  This way he can carve out a small profit.
4. Joe has as REO and rents it out.  With the new laws set in place, Joe could rent it out for up to 2 years and the 1st would not legally be allowed to foreclose on the property.  This method Joe keeps every months rental payment and recoups his money to make a nice little profit.
5. Joe has an REO and decided to rent it out and PAY the 1st mortgage.  Since the 1st is getting their money, they most likely won’t foreclose.  Joe has a renter that is paying down the 1st mortgage creating more equity every month AND Joe owns a property that he doesn’t have the mortgage in his name.  So if anything happens, he won’t get his credit dinged.

There are a few more options that can be done but they are very HIGH LEVEL and I didn’t want to get into it with the home owner.  So after I explained those 5 points the homeowner saw how that little 2nd mortgage had just as much power if not MORE than the 1st when it came from the investors point of view. In closing I would like to say that I’m not the brilliant mind that came up with these strategies.  I learned them from the industry experts such as Saprina Allen, Dave Van Horn and Gordon Moss.  Those people are the experts and have much better ideas and strategies than I do.  I just merely wanted to dust off some cobwebs and have a chat.