That plan would have to essentially be a lender write-down to the current market value of the property and a new loan based upon the new lower balance, as a homeowner who is in foreclosure would probably have a tough time finding outside financing to purchase the property.
The plan sounds like it could be a win-win. The lender may avoid some of the costs associated with an REO/sale and they get their price. The buyer lives for free for a number of months, then gets a nice chunk of their loan written off and lower payments.
There are a few potential impediments to such a deal, including securitized loan issues and lender unwillingness to reward delinquency. But it seems to make sense to do the deal, doesn’t it? Which is probably why it won’t get done…
A twist on this scenario is the potential manuevering on 80/20 purchase money loan packages that were very common here in CA during the boom. Once the value of the home drops down about 20%, the 2nd is toast, at which time the buyer simply stops paying on it. The 2nd then has three options – foreclose (and incur expenses with zero recovery – not likely), do nothing and hope values go back up, or negotiate a settlement for pennies on the dollar. I would imagine that if the 2nd is not inclined to settle and decides to sit tight, the homeowner could go into default on the 1st mtg and thus threaten the 2nd with a complete wipe-out. That may provide the necessary incentive to settle, after which the borrower could bring the 1st current and stay in the home, now minus the 2nd.
