If you own an investment property financed by Bank of America or serviced by Bank of America, you may be in luck if the property is now underwater, worth less than what is owed, or otherwise distressed. This may be true particularly where the investment property has a second mortgage, all or part of which exceeds the value of the property.
Where a second mortgage secures an amount of debt that exceeds the value of a property, that second mortgage can be referred to as underwater or unsecured.
What a mortgagor (the party who grants a mortgage on real property as security for a debt owed) must understand is that mortgagees (the party who holds the security interest, ie: the bank) value their loans based on a variety of factors one of which is whether or not the loan is secured by the actual value of the underlying real property.
If a mortgagee in second position (the mortgage holder has a second mortgage) has loaned 100,000 dollars on a Myrtle Beach condo, if the mortgagee in first position is owed 250,000 dollars on property having an actual value of 260,000 dollars, the second mortgage holder will consider its 100,000 loan unsecured or underwater. In the scenario set forth, even though the property is nominally worth 260,000 dollars, the second mortgagee must account for the costs of actually having the property sold: for example, there will be carrying costs associated with temporary ownership of the property (regime payments since it is a condo, tax payments, insurance payments, maintainenace, etc) and then there will be the transaction costs commonly associated with an actual sale (liquidation of the security), the most important of which are real estate commissions, typically 6% of the sales price. In this example, if the debtor stops making payments to the second mortgagee (let us assume it is Bank of America that is owed the 100,000 dollars on the second mortgage or HELOC) will be forced to choose between the following options:
BANK OF AMERICA'S POINT OF VIEW AND OPTIONS
1. Sue for foreclosure and have the property sold at auction. The option is not good for Bank of America given the facts here because investors that show up to bid at auctions are bottom feeders and will bid anywhere from 15-20% less than the property's fair market value (FMV). Consequently, if the property sells to a third party purchaser at auction it will sell for between 210,000 and 235,000 dollars (15-20% discount from FMV). If the first mortgage holder purchases the property in order to avoid giving it away for much less than FMV, the first mortgage holder (lets assume it is Wells Fargo in this case) is certain to bid only up to the amount it is actually owed, in this scenario it is owed 250,000 dollars. In either case then, Bank of America will not receive a single dollar as a result of the auction because the first 250,000 dollars of auction proceeds will go straight to Wells Fargo, the first mortgage holder. If Bank of America bids on the property, it will have to outbid the first mortgage holder who will be up to the amount it is owed, consequently, Bank of America will have to bid more than 250,000 dollars to win the auction, which means Bank of America ends up buying an asset that is guaranteed to be sold at a loss. Bank of America, consequently, would never bid on the property at a foreclosure auction given the circumstances set forth here.
2. Sue the debtor personally and hope he has assets that can be liend or agrees to pay the amount owed under threat of suit. The problem facing Bank of America with this option is that most people do not have 100,000 dollars lying around in a bank account. This means Bank of America will have to go to extensive lengths to get paid, even if it sues the debtor and gets a judgment. Some of its options will be special proceedings to levy bank accounts or executing on real or personal property, or, it may try to garnish wages (however, not in South Carolina, a non-garnishment state). Whatever the case, in this option Bank of America will be forced to retain attorneys to initiate the lawsuit, and the debtor will have an opportunity to defend himself. Lawsuits usually take at least a year to resolve, and frequently take longer than that. During this period, Bank of America is spending money without any certainty of ever getting a nickel from the debtor. For certain the debt would be dischargeable in a bankruptcy filing. The discharge via bankruptcy possibility by itself reduces the value of the debt and renders the attractiveness of option 2 marginal in most cases. As a result of a variety of factors, uncertainty means Bank of America may be throwing good money after bad, something its bean counters don't like to do. Consequently, Bank of America will not consider suing the debtor directly and hoping it can find assets or force the debtor to settle a very good option - it is time consuming, expensive and uncertain, any one of which on its own is a deterent from Bank of America's point of view. Consequently, Bank of America will undertake option 2 as a last resort.
3. Assign or sell debt to debt collection company. This is the preferred method for Bank of America in this scenario. It has the advantage of being quick and producing immediate income. Of course, Bank of America will not be able to sell the debt for anywhere near the amount actually owed. Typically, the debt will be sold for a sum derived from a variety of factors, in a nutshell, the debt buyer will estimate how much it can reasonably expect to recover from the debtor and then pay some fraction of the estimated amount. These factors are not difficult to figure out: whether the debt is partially secured, whether the debtors estimated income/assets/ make it likely the collector will get paid, etc. In any case, Bank of America will sell the debt to a junk debt buyer for between 2 cents and 40 cents on the dollar. The range can vary widely. But rest assured, the debt buyers and collection agencies are very sophisticated. Algorithms exist that can estimate within a relatively accurate range the amount a collector / debt buyer might actually recover over time. The more information known about the debtor, the more accurate the estimate will be. Bank of America will most likely prefer option three in the scenario because it provides certainty and clarity, something the bean counters running Bank of America crave. Bank of America doesn't like taking a big loss on the loan, but the burden of carrying non-performing assets is considerable and in the end, Bank of America doesn't really have any good options, so it takes the least costly option that provides the most certainty.
4. Settle the debt directly with the debtor for less than the amount owed. This is the clear preference of both Bank of America and the debtor in the scenario thus far presented. Suppose the debtor in this case offers Bank of America 15,000 dollars cash as settlement in full on the 100,000 dollar debt. Bank of America has a difficult decision to make, but as has been illustrated, as low as the offer is, it may be better than any other option Bank of America has available to it. Let's consider this from the Bank's point of view: the bank will analyze the 15k offer by measuring it against options 2 and 3 above. Option 2 is desirable only if the bank has a very high level of confidence that the debtor will pay more than 15,000 dollars if Bank of America obtains a judgment against him. Typically, that won't be the case unless the debtor has property that can be liend and executed upon or better yet a more liquid asset such as a bank account with a lot of money it in that can be seized or if the debtor has a high income that can be garnished. This is seldom the case, and even where it is the case, such debtors are the sort most likely to retain counsel to defend them from bank in court. If the debtor retains a lawyer to defend the lawsuit, the Bank has just created another huge headache for itself and guaranteed that there will be no resolution to the outstanding debt soon - compared to option 2, a one time immediate payment of 15,000 dollars starts to look increasingly favorable. Next, Bank of America will consider where it ends up if it resorts to option 3. Comparatively, Bank of America will likely conclude that option 4, the 15,000 settlement offer, is fairly attractive. Consider that most junk debt buyers pay 2-20 cents per dollar of debt acquired. Twenty cents on the dollar would be fantastically rare and would only apply to certain categories of debt and within those categories in only certain circumstances - essentially where the same factors that might make option 2 look attractive: namely, a high level of certainty that the debtor has resources and also wishes to avoid a judgment. In those rare cases, the debt buyers might consider paying a big premium for a non-performing, unsecured asset. If those circumstances are present, Bank of America must still measure all of the costs/risks against a quick settlement for 15,000 dollars. Whatever the case, Bank of America will give strong consideration to settling the debt directly with the debtor.
Bottom line: Bank of America is not in the business of collecting on unsecured debt. To the extent it wants unsecured debt, it wants that debt floating at an interest rate that more accurately reflects the risks associated therewith: ie: at credit card rates. Second mortgages were written at very low rates, rendering the loans incredibly undesireable assets to have lying around, particularly when they aren't performing and especially when they are unsecured and in default.
Consequently, property owners with second mortgages that are underwater or unsecured have a fairly strong position vis a vis their bankers. Traywick Law Offices has successfully settled second mortgages for fractions of the amounts owed, settlements which have made investment properties that had lost value look significantly less horrible and settlements which have enabled clients to afford to live in properties that were unaffordable in the context of underwater second mortgages or HELOCs.
If you have property that is underwater, particularly where a second mortgage represents all or most of the negative equity, consult with Traywick Law Offices to discuss your options today.