“anyone think that the banks would concede to this kind of commando/in your face/I’m gonna screw you if you don’t sweeten the pot kind of attitude or would they say F you, get out, we’ll just foreclose..even though they will take a bath if they foreclose on the house???”
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Using the 80/20 financing example, if the comps are 20% less than the purchase price, the piggyback lender is essentially unsecured. They are actually looking at a total loss at a value drop of less than 20% due to carrying and foreclosure costs. So how will a piggyback lender in such a valuation scenario (which I think we have already reached and exceeded in some areas) react to a borrower who simply stops paying them?
I see three choices – 1) foreclose and get $0 (or even take a further loss) after paying off the 1st and costs; 2) do nothing and hope values go back up; or 3) negotiate a short pay and take what you can get.
#1 simply makes no sense. Not going to happen.
#2 is a possibility but it becomes a completely non-performing loan for who knows how long?
#3 seems to be the most likely result. Take what you can get and write off the rest.
If it plays out this way, the borrower with ability in his $800K (purchase price) home forks over maybe $10K – $15K to the piggyback lender and wipes out a $160K 2nd. Now he’s got a first of $640K that he can already afford and he’s freed up $1K/month cash by wiping out the piggyback. Not a bad end result. Assume he was upside-down 25% – now he’s only upside-down 5%, can easily afford his mortgage and he has an extra $1K/month to play with. And of course the piggyback lender will not report him as delinquent once the deal is done so there is a minimal if any credit hit.
