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Note demands by junior lein holders

Posted by Stephen B. McWilliam on December 26, 2009 at 12:11pm
The knee jerk reaction by many is to refuse to sign a note upon a junior lien holder’s demand. One may successfully argue that position. However, in the end if the junior lien holder will not let up the Borrower is not in any worse position if they sign the note.First, they already have a note with that lender on which the lender will sue. This new unsecured note replaces the original note that is secured by a mortgage. The Borrower can always attempt to settle that new note at some point in the future.The main advantage in signing the note is that the Borrower will have avoided the foreclosure and any possible deficiency judgment that may occur on liability to the first lender. Furthermore, in avoiding the foreclosure they may be eligible for a conventional mortgage once the Borrower does not have any mortgage late payments in the past 12 month cycle.Basically, we recommend all attempts be employed to avoid the proposed note and to seek a full release of liability. Typically, as a last resort the Seller may be able to offer some additional money at closing in lieu of the note. However, in the end there is virtually no reason not to sign the proposed note if that is the only way to avoid the foreclosure.
Tags: deficiency, holders, judgment, junior, lien, notes
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Comments

  • Bryant Tutas December 29, 2009 at 2:50am
    Stephen, Great point with "they already have a note". I always use this to help them understand that they are really just replacing a larger secured note with a much smaller unsecured note with zero interest. It's not a bad deal.
  • Stephen B. McWilliam December 27, 2009 at 6:00am
    What we all need to keep in mind is that the junior lien holder is considered an unsecured creditor in a BK petition if the value of the property is less than the superior encumbrances. When the loss mitigators, including HOA/Condo Association realizes that the Borrower is a serious BK candidate they tend to reevaluate their demands.

    The Borrower can always file for a BK Chapter 13 (total cost approximately $2k), renegotiate the junior liens for a total discharge and then withdraw their BK petition. Rather dramatic, but it can work.
  • Wendy Rulnick December 27, 2009 at 5:46am
    Stephen - You make good points. Another tip, that Bryant and I found in The Negotiator interview, is that sometimes the note payments do not have to start for months or even a year later. You can just "ask".
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