[DaCounselor]

Good thread SDR. Most of my recent posts and almost the entirety of my discussions with my 2 best lending industry contacts have related to section f. of your original post. I will be merciful and won’t rehash those posts here but simply state that the handling of the piggybacks is going to be an issue of ever-increasing visibility moving forward. The threshold question for those attempting short sales because they can’t service the debt is whether wiping out the 2nd will allow them to stay in the home.

Cavalier – no, the 2nd is not automatically recourse. If it was taken out to purchase the property or to refi a purchase money loan (with no cash out) it is non-recourse. Even if it is recourse, it has not been the custom for lenders to pursue the borrower directly. I suspect this may change moving forward due to the volume and level of losses, but you are talking about a lawsuit that will cost the lenders money and may lead to minimal if any ultimate recovery for a variety of reasons. A pennies-on-the-dollar settlement is far more likely.

[DaCounselor]

Good thread SDR. Most of my recent posts and almost the entirety of my discussions with my 2 best lending industry contacts have related to section f. of your original post. I will be merciful and won’t rehash those posts here but simply state that the handling of the piggybacks is going to be an issue of ever-increasing visibility moving forward. The threshold question for those attempting short sales because they can’t service the debt is whether wiping out the 2nd will allow them to stay in the home.

Cavalier – no, the 2nd is not automatically recourse. If it was taken out to purchase the property or to refi a purchase money loan (with no cash out) it is non-recourse. Even if it is recourse, it has not been the custom for lenders to pursue the borrower directly. I suspect this may change moving forward due to the volume and level of losses, but you are talking about a lawsuit that will cost the lenders money and may lead to minimal if any ultimate recovery for a variety of reasons. A pennies-on-the-dollar settlement is far more likely.

[DaCounselor]

Good thread SDR. Most of my recent posts and almost the entirety of my discussions with my 2 best lending industry contacts have related to section f. of your original post. I will be merciful and won’t rehash those posts here but simply state that the handling of the piggybacks is going to be an issue of ever-increasing visibility moving forward. The threshold question for those attempting short sales because they can’t service the debt is whether wiping out the 2nd will allow them to stay in the home.

Cavalier – no, the 2nd is not automatically recourse. If it was taken out to purchase the property or to refi a purchase money loan (with no cash out) it is non-recourse. Even if it is recourse, it has not been the custom for lenders to pursue the borrower directly. I suspect this may change moving forward due to the volume and level of losses, but you are talking about a lawsuit that will cost the lenders money and may lead to minimal if any ultimate recovery for a variety of reasons. A pennies-on-the-dollar settlement is far more likely.

[DaCounselor]

Good thread SDR. Most of my recent posts and almost the entirety of my discussions with my 2 best lending industry contacts have related to section f. of your original post. I will be merciful and won’t rehash those posts here but simply state that the handling of the piggybacks is going to be an issue of ever-increasing visibility moving forward. The threshold question for those attempting short sales because they can’t service the debt is whether wiping out the 2nd will allow them to stay in the home.

Cavalier – no, the 2nd is not automatically recourse. If it was taken out to purchase the property or to refi a purchase money loan (with no cash out) it is non-recourse. Even if it is recourse, it has not been the custom for lenders to pursue the borrower directly. I suspect this may change moving forward due to the volume and level of losses, but you are talking about a lawsuit that will cost the lenders money and may lead to minimal if any ultimate recovery for a variety of reasons. A pennies-on-the-dollar settlement is far more likely.

[DaCounselor]

“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???”
_________________________________

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.

Piggybacks are going to get creamed.

[DaCounselor]

“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???”
_________________________________

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.

Piggybacks are going to get creamed.

[DaCounselor]

“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???”
_________________________________

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.

Piggybacks are going to get creamed.

[DaCounselor]

“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???”
_________________________________

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.

Piggybacks are going to get creamed.

[DaCounselor]

“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???”
_________________________________

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.

Piggybacks are going to get creamed.

[DaCounselor]

Ditto what SDR said. You are not likely to get a loan mod at this time without full documentation, so it will be difficult if not impossible to truly “fake out” the servicer/lender.

That being said, it is conceivable that we may see some changes in the future mod protocol if enough borrowers with ability decide to play chicken with their servicer/lender. As an example, consider a borrower who financed 100% of his $800K home, the home comps at $560K, and he has the ability to continue servicing his $800K mortgage. The borrower gives the servicer/lender an option – either lock me into a low fixed rate and/or write down my loan balance to the comp level, or I will go into default. What will the servicer/lender do if this type of proposition becomes commonplace? I submit that it very well may be in the financial interest of the lender to capitulate as opposed to taking on an REO.

Regarding 80/20 deals, there has already been cyber-chatter regarding those with ability to pay playing chicken with the piggyback lender by simply stopping payments and forcing the lender to react. If the piggyback lender has essentially an unsecured loan due to reduction of home value, why would they foreclose? The implication is that the lender will accept pennies on the dollar in a short-pay deal just to get something. Again, the pre-requisite is that the borrower is geared-up for a game of chicken, is prepared to go into default, and is even prepared to go into default on their first mortgage to create the threat of a complete wipe-out of the piggyback loan.

In the first example above, it will certainly require financial disclosures as the lender needs to confirm ability to pay. In the 80/20 situation, there is arguably no need for financial disclosure, much as the lender would like it, because the proposition is take it or leave it regardless of ability.

I expect many future examples regarding the intracacies of negotiations with servicers/lenders in this regard. We are already seeing templates for how to address particular situations and more of the same to come.

[DaCounselor]

Ditto what SDR said. You are not likely to get a loan mod at this time without full documentation, so it will be difficult if not impossible to truly “fake out” the servicer/lender.

That being said, it is conceivable that we may see some changes in the future mod protocol if enough borrowers with ability decide to play chicken with their servicer/lender. As an example, consider a borrower who financed 100% of his $800K home, the home comps at $560K, and he has the ability to continue servicing his $800K mortgage. The borrower gives the servicer/lender an option – either lock me into a low fixed rate and/or write down my loan balance to the comp level, or I will go into default. What will the servicer/lender do if this type of proposition becomes commonplace? I submit that it very well may be in the financial interest of the lender to capitulate as opposed to taking on an REO.

Regarding 80/20 deals, there has already been cyber-chatter regarding those with ability to pay playing chicken with the piggyback lender by simply stopping payments and forcing the lender to react. If the piggyback lender has essentially an unsecured loan due to reduction of home value, why would they foreclose? The implication is that the lender will accept pennies on the dollar in a short-pay deal just to get something. Again, the pre-requisite is that the borrower is geared-up for a game of chicken, is prepared to go into default, and is even prepared to go into default on their first mortgage to create the threat of a complete wipe-out of the piggyback loan.

In the first example above, it will certainly require financial disclosures as the lender needs to confirm ability to pay. In the 80/20 situation, there is arguably no need for financial disclosure, much as the lender would like it, because the proposition is take it or leave it regardless of ability.

I expect many future examples regarding the intracacies of negotiations with servicers/lenders in this regard. We are already seeing templates for how to address particular situations and more of the same to come.

[DaCounselor]

Ditto what SDR said. You are not likely to get a loan mod at this time without full documentation, so it will be difficult if not impossible to truly “fake out” the servicer/lender.

That being said, it is conceivable that we may see some changes in the future mod protocol if enough borrowers with ability decide to play chicken with their servicer/lender. As an example, consider a borrower who financed 100% of his $800K home, the home comps at $560K, and he has the ability to continue servicing his $800K mortgage. The borrower gives the servicer/lender an option – either lock me into a low fixed rate and/or write down my loan balance to the comp level, or I will go into default. What will the servicer/lender do if this type of proposition becomes commonplace? I submit that it very well may be in the financial interest of the lender to capitulate as opposed to taking on an REO.

Regarding 80/20 deals, there has already been cyber-chatter regarding those with ability to pay playing chicken with the piggyback lender by simply stopping payments and forcing the lender to react. If the piggyback lender has essentially an unsecured loan due to reduction of home value, why would they foreclose? The implication is that the lender will accept pennies on the dollar in a short-pay deal just to get something. Again, the pre-requisite is that the borrower is geared-up for a game of chicken, is prepared to go into default, and is even prepared to go into default on their first mortgage to create the threat of a complete wipe-out of the piggyback loan.

In the first example above, it will certainly require financial disclosures as the lender needs to confirm ability to pay. In the 80/20 situation, there is arguably no need for financial disclosure, much as the lender would like it, because the proposition is take it or leave it regardless of ability.

I expect many future examples regarding the intracacies of negotiations with servicers/lenders in this regard. We are already seeing templates for how to address particular situations and more of the same to come.

[DaCounselor]

Ditto what SDR said. You are not likely to get a loan mod at this time without full documentation, so it will be difficult if not impossible to truly “fake out” the servicer/lender.

That being said, it is conceivable that we may see some changes in the future mod protocol if enough borrowers with ability decide to play chicken with their servicer/lender. As an example, consider a borrower who financed 100% of his $800K home, the home comps at $560K, and he has the ability to continue servicing his $800K mortgage. The borrower gives the servicer/lender an option – either lock me into a low fixed rate and/or write down my loan balance to the comp level, or I will go into default. What will the servicer/lender do if this type of proposition becomes commonplace? I submit that it very well may be in the financial interest of the lender to capitulate as opposed to taking on an REO.

Regarding 80/20 deals, there has already been cyber-chatter regarding those with ability to pay playing chicken with the piggyback lender by simply stopping payments and forcing the lender to react. If the piggyback lender has essentially an unsecured loan due to reduction of home value, why would they foreclose? The implication is that the lender will accept pennies on the dollar in a short-pay deal just to get something. Again, the pre-requisite is that the borrower is geared-up for a game of chicken, is prepared to go into default, and is even prepared to go into default on their first mortgage to create the threat of a complete wipe-out of the piggyback loan.

In the first example above, it will certainly require financial disclosures as the lender needs to confirm ability to pay. In the 80/20 situation, there is arguably no need for financial disclosure, much as the lender would like it, because the proposition is take it or leave it regardless of ability.

I expect many future examples regarding the intracacies of negotiations with servicers/lenders in this regard. We are already seeing templates for how to address particular situations and more of the same to come.

[DaCounselor]

Ditto what SDR said. You are not likely to get a loan mod at this time without full documentation, so it will be difficult if not impossible to truly “fake out” the servicer/lender.

That being said, it is conceivable that we may see some changes in the future mod protocol if enough borrowers with ability decide to play chicken with their servicer/lender. As an example, consider a borrower who financed 100% of his $800K home, the home comps at $560K, and he has the ability to continue servicing his $800K mortgage. The borrower gives the servicer/lender an option – either lock me into a low fixed rate and/or write down my loan balance to the comp level, or I will go into default. What will the servicer/lender do if this type of proposition becomes commonplace? I submit that it very well may be in the financial interest of the lender to capitulate as opposed to taking on an REO.

Regarding 80/20 deals, there has already been cyber-chatter regarding those with ability to pay playing chicken with the piggyback lender by simply stopping payments and forcing the lender to react. If the piggyback lender has essentially an unsecured loan due to reduction of home value, why would they foreclose? The implication is that the lender will accept pennies on the dollar in a short-pay deal just to get something. Again, the pre-requisite is that the borrower is geared-up for a game of chicken, is prepared to go into default, and is even prepared to go into default on their first mortgage to create the threat of a complete wipe-out of the piggyback loan.

In the first example above, it will certainly require financial disclosures as the lender needs to confirm ability to pay. In the 80/20 situation, there is arguably no need for financial disclosure, much as the lender would like it, because the proposition is take it or leave it regardless of ability.

I expect many future examples regarding the intracacies of negotiations with servicers/lenders in this regard. We are already seeing templates for how to address particular situations and more of the same to come.

[DaCounselor]

I would be more inclined to call it stupidity as opposed to honor, Kelly. Our astute “investor” (characterizing a property that is negative cash flow from the get-go an “income” property is our first sign of who we are dealing with) throws down the morality card we have debated here for months. My advice to this person, having already acknowledged that they have made a bad business decision, is to start thinking long and hard about whether their priorities should rest with some over-reaching sense of obligation to their neighborhood as opposed to their own family.

Yes indeed, there is great “honor” in sinking increasing amounts of money into a bad investment while neglecting your childrens’ educational funds. That makes tremendous sense. Perhaps the children don’t even really need higher education, thus increasing the likelihood that they will perpetuate their parents’ fine investment decisions. Fantastic idea. After all, we don’t want to cause any problems for next door neighbor Bob’s refi or ruffle any feathers in the neighborhood.

This person’s circumstances are affected by the fact that the distressed property is, ahem, “income” property, which has certain legal implications relating to…walkability. Speaking more in generalities, then, I suggest that anyone who can walk with nothing but a damaged credit report must consider doing so if the alternative is financial ruin. Anyone who steers their own bus, family aboard, over the cliff when there is a way out is arguably an idiot.

And what of those, you ask, who do not face financial ruin but instead would like to shave a few hundred grand off their mortgage balance? I can hear the morality drumbeats grow louder on this one, but I’m not inclined to cast stones regarding someone’s business decision pursuant to a contract that if at all typical has provisions on point. Now will there be a macroeconomic effect of decisions to walk? Yes. Will I be affected in some way? Probably. But it’s certainly naive to believe that we have not been affected by the decisions of our fellow man/consumer/borrower/insured/etc over the span of time. This is no different.

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