Tuesday, February 17th, 2009 at 8:56 PM
Working a Short Pay
GL sent in this question:
I have a question, which maybe other people who read your blog might be curious about as well:
My parents, who live in Las Vegas, own a second property, a condo that they rent out. They owe about $70,000 on the mortgage. They are model borrowers who have never been late on a payment. Recently, they came into some cash, and are now in a position to pay off the mortgage outright.
Do you think the mortgage lender would be willing to give them a discount if they paid off the mortgage? And if so, how much? Would the fact that this is a second property, and not a primary residence, influence the negotiation, if there is one?
If this were a short sale of a primary residence, the bank would be happy to get $1,000 to $4,000 on a second mortgage in a market like Vegas. So that is the best-case scenario.
What’s the best strategy?
You have to get their attention if you want a big discount. Miss your next payment for starters. I know, that sounds insane, but one 30-day late in this environment isn’t going to kill your credit score, and it’ll recover after a few years.
The minute you go 30 days late, the collectors start calling. Tell them you have no intention of ever making another payment.
Then the week before you go 60 days late, send them a copy of a cashier’s check for $x amount, made out to the bank or cash, and tell them they have a day to decide if they want it. Mention that you’ll wire the funds today if it’ll make a difference. Give yourself a couple of days before the 60-day late for them to make a decision.
What’s the right amount? I think they’d do $50,000 in a heartbeat.
I don’t think the primary residence or rental will matter, by the time you get to the collectors, it’s just a loan.
Posted on Tuesday, February 17th, 2009 at 8:56 PM in Loan Mods | 48 Comments » | 
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Good Advice–However, it is going to get alot of heat from fellow bloggers over moral and ethical issues with such advice. Let’s wait for the bullets to fly!!!
Local Boy | February 17th, 2009 at 9:33 pmIt all depends on how much equity they have.
If they have a lot of equity, the lender has them over the barrel.
If they don’t have any equity, the lender might take it…. but it could still backfire. The problem is that the servicer doesn’t have much skin in the game, and may just send you to foreclosure anyways.
greenlander | February 17th, 2009 at 9:51 pmMaybe you can even get the bank to adjust the principal. Heck, they might owe you money at this point. Be polite and offer to finance their debt.
no bubble here | February 17th, 2009 at 9:56 pmGreenlander is right, it will depend on how much equity they have in the property. If it’s worth anywhere close to the note amount, you’re not going to get any kind of discount. In fact, if you have a 6+% rate on the loan, then it’s a better asset than the 5% loans they’re writing now.
Westparker | February 17th, 2009 at 10:03 pmI wouldn’t hurt my credit over a “maybe” because frankly Jim, no one knows. The banks are erratic and changing their guides on a daily basis.
My feeling is that they can do just as well in the long run by refinancing the place to a long term, low rate fixed mortgage and investing the cash.
Seems like a nice financial play. And F*** the banks.
Tyrone | February 17th, 2009 at 11:03 pmThanks Jim.
I was seriously considering you as representing me in looking for an income property in San Marcos or Oceanside. Now, not so much.
Of the many real estate agents I’ve dealt with, none will be up for sainthood soon, yet you really manage to stand out here, at least in terms of letting your immoral flag fly.
If it’s no problem for you to screw the bank, where’s my assurance that you won’t screw me for a quick sale? I mean it’s not like I can say “I didn’t know the guy was a crook”, is it?
Mr. B | February 17th, 2009 at 11:25 pmSounds like good business to me.
Stephen Waits | February 17th, 2009 at 11:35 pmIt sounds like they have significant equity. If I were the bank I’d be scratching my head because they’d be offering me instant profit via foreclosure.
BDiego | February 18th, 2009 at 12:31 amMr. B.
Thanks for voicing your opinion.
Note that the bank isn’t my client here, the borrower is. I’m giving the best advice for my client, given the situation. If it was a bank asking me for advice in a case like this, I’d tell them to go after every penny.
If you wondering about a 30-day late, I did call a mortgage broker who told me that one late payment in an otherwise solid loan package isn’t a deal-killer.
I also said that one late “isn’t going to kill your credit score, and it’ll recover after a few years.” If the borrower has any plans for credit in the next few months, then tread carefully. Like Westparker said, you really don’t know what to expect from banks, so if you don’t want to chance it, then pay full boat.
Finally, thank you Mr. B for leaving the door open just a crack for me to represent you. There are 20,000 active realtors in this county that would be happy to serve you. Most are wamsy-pamsy, and give you no indication whatsoever how qualified they are to represent your interests.
At least with me you know what you get, because I lay it out here. I’ll be a nice guy most of the time, but if the situation calls for for me to give ruthless, hard-hitting advice, then you’ll get it. This business is as cutthroat today as I’ve ever seen it over the last 25 years, and your agent needs to be able to handle it.
Immoral? Give me a break. I’ve been married for 20 years, I don’t cheat on my taxes, I get full-doc mortgages, and I wave at my church every time I drive by.
If you want immoral, go over to BMIT and read about the LLC made up of lawyers who just went tango uniform in Bressi Ranch. They bought the model homes and leased them back to the builder, and guess what – eight NODs filed this week.
Jim the Realtor | February 18th, 2009 at 5:09 am“I love it when a plan comes together.”
Where have I seen this advice before? Oh yes: http://exurbannation.blogspot.com/2007/12/stop-paying-your-2nd-now.html
This particular case may not need my solution however. As an income property if it cash flows then do nothing. The payments are charged against rental income. Paying off the note means the rent becomes ordinary taxable income. Possibly not the best use of a cash windfall. Use the cash to purchase a different condo with lower basis then threaten to default on this one and then short sell for the note. The new condo is sure to cash flow even better.
Rob Dawg | February 18th, 2009 at 5:18 amHey Jim, what are we doing up this early?
anyway, I wanted to add that whatever is negotiated it doesn’t hurt to try and get a promise of no credit impairment as part of the deal.
Rob Dawg | February 18th, 2009 at 5:29 amTango Uniform? Gotta look it up again.
So now Jim, Rob and I are all up at the computer WAY too early.
Sheesh.
GLG | February 18th, 2009 at 6:18 amYou can always ask the bank to show you the original mortgage paperwork. Supposedly, they won’t have it 40% of the time, at which point you’re free and clear.
http://bubblemeter.blogspot.com/2009/02/cool-trick-to-delay-foreclosure.html
no bubble here | February 18th, 2009 at 6:27 amSo now we’re helping deadbeats by giving them advise on how to scam the system? What ever happened to business ethics?
shadash | February 18th, 2009 at 6:59 amWhat ever happened to business ethics?
Damn, another keyboard ruined. At least it was decaf and not some of that tasty Syrah that Jim’s friend served at the 50th blowout bash.
Rob Dawg | February 18th, 2009 at 7:04 amJim did what a good realtor should do in this case: describe what the clients would need to do in order to get the proposed result, what the potential upside benefit and downside effects on credit worthiness would be and leave it to the clients to decide if it is within their financial and ethical comfort range.
Lenders have brought this sort of behavior upon themselves. If they hadn’t brought their own industry to its current state, what to do with a nonpaying mortgage on a non owner-occupied investment property would be a no-brainer. But they’ve spent the past 6 or 7 years teaching borrowers that doing the sorts of things that Jim describes can produce better results than doing things “the right way,” with no downside other violating than one’s own personal ethics. Not surprising, really, since bankers have shown they mostly don’t really have any themselves.
GeneK | February 18th, 2009 at 7:11 amWhat Jim is proposing is grossly unethical. It’s one thing to offer a discount settlement if you can’t afford to pay what you promised. That’s unfortunate, but shit happens. But to do it when you jolly well have the money to do the right thing? Very bad.
If GL goes ahead with this, I hope his lender has the stones to file suit.
Johan Larson | February 18th, 2009 at 7:26 amJim, do you know of any situations where what you propose has actually worked in recent times?
The decision maker on this kind of thing is generally going to be a few orders of magnitude above the $10 an hour loss mitigation specialist or the front line collection geek, and is probably more intelligent.
And if it is a situation where it is a servicer who does not own the note involved, there is no way that you would ever get that kind of quick decision.
So I would think that the chances of you getting an acceptance of this kind of proposal before you are 60 days late is kind of bleak. One late, followed by an all cash discount offer is going to raise a lot of red flags.
Kingside | February 18th, 2009 at 7:34 amSince this isn’t a primary residence, I’m pretty sure the debt forgiven would also be taxable as income. That might not matter to them if they’re retired, but it’s a consideration.
sclause | February 18th, 2009 at 7:34 amGood god people – someone asked Jim what the pros and cons of a course of action was. Jim didn’t suggest it, nor does he recommend it.
I for one am glad to know the people here can always come to Jim for his (free!) advice and straightfoward opinion about things.
Big E | February 18th, 2009 at 7:35 amThere is NO WAY IN HELL the banks are going to give a discount if you pay it off.
Todd | February 18th, 2009 at 7:45 amJoan:
>>What Jim is proposing is grossly unethical. <<
Please be advised that billions and trillions of dollars are being used by Obama teams to promote this exact unethical behaviors.
Go complaining to your congressman.
george8 | February 18th, 2009 at 7:46 amCome on people, JtR provided a possible solution in a business transaction between an individual and a bank and you you guys are flying the ethics flag?
If you don’t like the advice, that’s fine, but to play the morality card is a bit dramatic.
JtR’s scenario is not without risk, and the bankers are big boys, they don’t have to take the proposal. You make it sound like JtR just told someone to throw a bunch of puppies in the river or something.
SD_Coastal | February 18th, 2009 at 7:57 amBack in the 90′s, you would see this kind of thing pulled off effectively when you were dealing with a bulk buyer of RTC paper at a discount. But then, you had the buyer who obtained the note at a discount to begin with. The more effective strategy back then was to have a third party approach the note holder on your behalf who would then buy the note at a discount. The note holder would not care as long as they were getting a better price than they got from the RTC.
Kingside | February 18th, 2009 at 7:59 amWhoah whoah whoah.
Sorry to say it, but this thread is so full of shit, I can hardly believe it.
I’ll tell you a little story of someone I know, and the story is true. In the oil patch bust, my friend and several of his friends all purchased a 10 unit apartment development for 300K with 30% down. Yes, they had a lot of cash for it.
The 4 investors all enjoyed cash flow from the property. It was clear to everyone (including the financier) that it was a rental property.
One day, the bank came to them and told them that they were calling the note. The investors had never missed a payment. When asked why they were calling the note, the bank said that it needed to reduce its exposure to this type of loan. No other explanation. So, my friend asked what terms they were willing to settle the note. The bank responded; 30% of principal. He settled the note in cash and bought out his partners. He showed me the paperwork to prove it and I will attest that this story is true.
So, it would seem to me the best course of action is to make it clear that the property is a rental and nothing more.
Any talk of missing payments is (in my mind) very short sighted. If you don’t want to manage it, sell it. If you do, but just want to pay it off, just sit on the money. We are about to see some deals that you will never again in your lifetimes see. That money could come in very very handy in the next 5 years. And the bank has to begin any negotiations.
Chuck Ponzi
Chuck Ponzi | February 18th, 2009 at 8:01 amDUDE…. DO THE RIGHT THING AND HAVE THEM PAY OFF THE OBLIGATION!
OCVulture | February 18th, 2009 at 8:28 amToo risky for the potential upside and a lot of downside. Keep the cash, get a lower rate. Not to mention time, energy and stress.
I wonder if just having good credit will be great credit by the time we get through this mess.
Mozart | February 18th, 2009 at 8:37 amExcellent advice but offer them $599 instead!
Obama | February 18th, 2009 at 8:49 amIf it was me, I’d either refi lower if the current rates are significantly better or not do anything if they aren’t. Either way, I’d rather have available “just in case” cash that’s sitting somewhere safer than in Las Vegas real estate right now.
GeneK | February 18th, 2009 at 9:01 amI think that one’s ethical obligation in dealing with a bank is to meet them at their level. They define the terms, both of the transaction and the ethics. And as we have seen in the last several years, that is a pretty low bar to limbo.
However, I have serious doubts that they are going to play this game with a customer in this environment, or at the very least, I don’t think it’s wise to take risks based on predictions of what they will do. If this blog continually illustrates one thing, it’s that banks are operating haphazardly, often in no one’s best interest, including their own.
And furthermore, if you one gets screwed playing a game like this, you only have yourself to blame. That’s where operating on your own ethical terms comes in handy. As they say, you can’t cheat an honest man.
Blissful Ignoramus | February 18th, 2009 at 9:11 amBy the way; this type of attempt to game the system is morally and ethically unconscionable to me. It does bleed over into other matters of a person’s life and society on the whole.
Mozart | February 18th, 2009 at 9:16 amGeez, I mentioned a while back that I helped engineer not one but two transactions that closed where Washington Mutual settled for $700,000 less than what was owed – on EACH deal.
Nobody said a word then. Not a peep.
Now I suggest how a guy might save a couple of bucks if he wants to work the system, and I’m ‘morally and ethically unconscionable’.
If you want to pay in full, go ahead, but they are willing to take less. If you think I’m a bad realtor for pointing it out, then fine, I’ll live with that. My job is to give you the options, and you decide what to do with them. P.S. I’m not gaming my own mortgages, I pay as agreed.
Jim the Realtor | February 18th, 2009 at 9:37 amWow, ethical or not this is happening on a grand scale throughout the banking industry. It’s like watching sausage being made. Suddenly I’m not hungry for sausage or eager to buy real estate unless someone is giving it away.
JE | February 18th, 2009 at 10:10 amI was told by a reputable mortgage mod outfit to mod my first and ‘forget about the second’ and offer pennies on the dollar so to speak. Sure there are other ramification, but perfectly legal. If the bank takes the deal then so be it.
3clicks from da Beach | February 18th, 2009 at 10:47 amJim answered a technical question. Perhaps a few flourishes, but the owners are responsible for acting ethically.
Mike_S | February 18th, 2009 at 10:58 amIn business, ethics walks a very fine line. I’m an executive recruiter. Some people think I’m unethical because I ‘steal’ a company’s best employees. Other people think I’m a hero because I advance the careers of very talented professionals. Ethical behavior seems to depend on which side of the sausage machine you find yourself.
GameAgent | February 18th, 2009 at 11:24 amOur government officials and financial institutions have redefined political and financial ethics for the modern age. Nothing in either of these areas is unethical anymore unless it is illegal.
GeneK | February 18th, 2009 at 11:30 amThanks all for your support – it is a fine line/sausage machine!
Jim the Realtor | February 18th, 2009 at 11:30 amI forgot to add that I’m going to keep my obligations to my first and second and default/negotiate on the second even though it is possible to ‘dump it’ for pennies on the dollar.
3clicks from da Beach | February 18th, 2009 at 11:37 amJim, I’m a bit confused as to why you call this a “second mortgage”. Are you referring to the fact that it’s on a non-owner-occupied property, or is it actually a true second-position lien on the condo? If it’s a first-position lien, there is no way the bank would take $1-4K even if it is an investment property.
Also, IMHO, this better be a SERIOUSLY nice condo (like Turnberry etc.) to consider even paying $50K to buy it outright. Many run-of-the-mill condos in Vegas can be bought for less than that now. For giggles, check out 4200 S. Valley View Blvd. This is a condo hotel. The units sold for $300-$400K in 2006 exclusively to investors. Now REOs are selling for less than $50K. HOA is approx. $800/mo (but includes daily maid service
. I would guesstimate that room occupancy is about 5%. There will be 100% foreclosure in this complex.
There are other buildings where the HOA is not so high. If GL’s parents are cash flowing on this property, they would be best served either buying another rental since cash flow is a piece of cake now, or otherwise investing the money. IMHO, a 100-point FICO drop is not worth $20K principal reduction on a condo right now.
IRE | February 18th, 2009 at 12:46 pmI didn’t say that clearly. The biggest discounts are for the second mortgages, whose holders are lucky to get $1,000 to $4,000 these days in a short sale. That would be the max benefit to expect, generally-speaking. In GL’s case, because it isn’t a short sale, they’ll hold out for more.
But once you get into the collection department, they are trained to settle. If you just call up while current on your payments, I doubt they’ll do anything for you.
Jim the Realtor | February 18th, 2009 at 1:19 pmOK Jim… sausage-making lessons are over for today. Let’s move along to the next event in the exciting life of a North County realtor.
GameAgent | February 18th, 2009 at 1:32 pmWhat makes the situation interesting is that there are two levels of “ethics” involved, person-to-person behavior and business behavior. If Jim had been advising a multinational corporation instead of an individual, would people have objected to his advice so much? I don’t think so. It would just be shrewd, aggressive business practice in a climate where asset prices are changing daily.
On the other hand, people don’t want ordinary interactions with everyday people to be based on “most money at all costs”. In this case, a corporation is interacting with an individual. Whose ethics should be applied, business ethics or individual ethics?
I think lenders gave up their moral stake to individual ethics when they started this housing debacle. We’re in this fix partly because they decided to stop “doing the right thing” and only concentrate on making as much money as possible as quickly as possible. Fine, but then I think it’s reasonable for the individuals they are treating with to act the same way.
Dwip | February 18th, 2009 at 2:02 pmHow much is the condo worth?
If it’s worth substantially more than 70K, the bank would be better off foreclosing
If it’s worth less than 70K and they love it so much, they should walk away and buy it back at the courthouse steps.
Nameless | February 18th, 2009 at 2:13 pmRemember, ethical or not BANKS ARE NOT YOUR FRIEND. Did you see the story about UBS.
BigWaveDave | February 18th, 2009 at 2:45 pmI found a wallet in the street. I could keep it without any obvious repurcussions. Technically it’s possible. Therefore advisable? What if the person that dropped it had a lot of money otherwise, is it still stealing?
Pose this question to a class of fifth graders. You’d get a pretty clear answer about right and wrong. If the kids know what to do, why are we adults so willing to muddy the waters?
I wish I had never read this post.
Depressing.
La Verdad | February 18th, 2009 at 5:39 pmOur nation’s banks are insolvent and being paraded around “Weekend At Bernie’s” style by the government; funded by the U.S. taxpayer. They are not insolvent because of clever homeowners trying to get 20k off their loan. For at least a decade both Wall St. and Main St. have acted entirely in anticipation of their government bailout. Those of us who have opted to stay on the sidelines and pass up both the run-up and collapse of our paper wealth really shouldn’t hate the players but instead hate the game (enough to insist something be done).
Jeff | February 18th, 2009 at 9:48 pmKudos to Jim. I love the site and the candor that can be so hard to come by these days.
Jeff,
While I disagree with you. I really like the ““Weekend At Bernie’s” style by the government” analogy. It made me laugh pretty hard.
shadash | February 19th, 2009 at 7:00 am