Case Studies

Mile Wide

Newish house hip roof freeimages.comThe House: 4 bed, 3 bath, 2000s-era construction in Platte City, MO, in the Kansas City suburbs. Value, $350,000.

First Mortgage: $400,000 with monthly payments of $2,000. Current at the time of purchase.

Second Mortgage: $55,000 plus fees and arrearages of $30,000. Our cost, $6,000 plus $2,500 in legal fees.

The Workout: $350/month with 10-year balloon.

The Story: The pioneers on the Oregon Trail said the Platte River was proofread my paper a mile wide and an inch deep. This note from our portfolio in Platte City, Missouri, is called Mile Wide.

The borrowers had started a new business just before the recession and had to declare chapter seven bankruptcy in order to keep their home in the wake of the 2008 financial crisis. The home was a spacious four bed three bath house in the suburbs, built and bought at the height of the real estate boom in the mid-2000s.

The borrowers were current on their $400,000 first mortgage even though the house was worth only $350,000, well underwater. When we bought the $55,000 second mortgage for about $6,000, the borrowers had not paid it for over three years.

Platte RiverSince they had discharged the debt of their second mortgage in bankruptcy, they were no longer personally liable for the debt. And we could not contact them in an attempt to collect it.

Our only remedy for the money owed was enforcement of the lien through foreclosure. Our goal is never to foreclose, but we often have to initiate foreclosure in order to get borrowers to take their situation seriously.

One week before the foreclosure auction, the borrowers contacted us. They said we were crazy to be foreclosing on an underwater house. We said we’d rather work out an affordable plan for them to keep their home, but if we had to foreclose, we could negotiate a short sale with the first mortgage, which we could have done.

The borrowers had emotional equity and wanted to keep their home of over nine years. They were raising children there and took excellent care of the property. Both the husband and the wife were successful professionals and they earned $11,000/month combined, but had additional debts and no savings.

Instead of insisting they pay the $30,000 of fees and arrearages to bring the loan current and then resume making their scheduled $800/month payments on their second mortgage, we asked how much they could afford? They said $350/month.

The day before the property was scheduled to be auctioned on the courthouse steps, we signed a new agreement with the borrowers lowering their interest rate and reducing their monthly payment to $350. For every six consecutive on-time payments they make, we also waive $2,000 of their fees and arrearages. Their payments come in like clockwork.

With a purchase price of $6,000 for the note plus $2,500 in foreclosure fees, our total investment was $8,500. With $4,200 in annual payments, our investors are earning a return of approximately 50% on this note. And the borrowers get to keep their home. We think of it is doing well by doing good.

In the world of nonperforming second mortgage investing, there will always be strikeouts, singles, doubles, triples and home runs. Mile Wide is a single.

Maple Syrup

Maple Syrup HouseThe House: Bread and butter 3 bed, 1 bath ranch in Maple Grove, MN, in the Minneapolis suburbs. Value, about $220,000.

First Mortgage: $170,000 with monthly payments of $1,250. Current at the time of purchase.

Second Mortgage: $67,000 plus fees and arrearages of $5,500. Our cost, $12,500.

The Workout: $25,000 payoff.

The Story: This sweet deal is called Maple Syrup after the Minneapolis suburb of Maple Grove where the home was located.

We left a few messages and the borrower returned our call without us having to begin foreclosure. The husband had lost his job in the recession, but had found new employment. Throughout the financial crisis, they had always found a way to make their first mortgage payment.

Maple SyrupThe borrowers had no savings but wanted to keep their home where they had lived nearly 20 years and raised their children. They were living month to month and did not feel they could afford any additional payments.

The borrowers were upset to be contacted as they had not paid their second mortgage in three years and put it out of their minds. They threatened to file bankruptcy which would delay our collection process but would not allow them to keep their home without paying their debt.

We did not want to foreclose. They did not want to file bankruptcy. The borrowers were able to borrow $25,000 from relatives which we accepted as payment in full for their debt.

We might have received more over time if we had to foreclose or take scheduled payments through a bankruptcy plan, but we wanted to be reasonable with our borrowers and increase our investors’ return through a quick payoff. We were able to double our investors’ money in just under six months for an annualized return of 300%.

In the world of nonperforming second mortgage investing, there will always be strike outs, singles, doubles, triples and home runs. Maple Syrup is a double.