Where would we go for these auctions? Does a person have the chance to view the property before the auction? Do they get the equivalent of a “carfax” for the property, showing who were the previous owners, what they paid, etc.? Does one also have access to recent listings in the area for comparison to determine current value?

Does the equity remaining in the property need to be above a certain level to make this worthwhile, eg. above the total value of the 1st and 2nd mortgages?

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[...] landlord? How about investing in 2nd mortgages? Million Dollar Journey gives a general over-view on investing in 2nd mortgages (I link to part 2 only). I have a long comment in part 2 about due diligence concerns and how to [...]

I’m not a lawyer, but my understanding is that if you want to foreclose, you need to assume the 1st mortgage first. Even with a “cross default”, the 1st mortgagee gets priority and doesn’t usually care about the 2nd, so you have to be prepared to buy the property yourself.

In other words, you may need quite a bit of money and time to be able to protect yourself in case of a default.

Often, people buy 2nd mortgages to get higher income, but don’t have money to back it up. When the borrower defaults, they cannot assume the 1st, so they have little or no recourse and just take the 100% loss. If they force the 1st to foreclose but cannot afford to put in a reserve offer, the 1st mortgagee can sell it off for just enough to pay off the 1st.

I have also heard stories of scams involving faked or exaggerated appraisals. An investor bought a mortgage believing it was only up to 80% of the home value, but it was actually more than the home value. In this case, foreclosure cannot protect you at all.

You need to do your due diligence and know what the property is really worth, who the borrower actually is, and understand the 2nd mortgage market. You should usually only invest in them if you have the financial strength to enforce a foreclosure or buy the property yourself.

Tax consequences are generally unfavourable, since all the interest is of course fully taxable, plus a capital gain on the sale is generally also considered interest income and therefore fully taxable.

Ed

Anitra, how does your mother go about finding 2nd mortgages to buy?

If structured properly, the mortgage was also RSP eligible (but you have to have a self-directed RSP account in order to invest in mortgage directly).

The really good 2nd mortgages can be found through mortgage brokers, experienced real estate lawyers or the 2nd mortgage circuit (try the Real Estate Investment Network). I would avoid the ads; on the “circuit” they give you everything you need to weigh your risk.

To answer CC’s question in a different angle than Q Cash- it depends on the terms and conditions of the 1st mortgage. It may have “cross default” provisions which means the borrower defaulting on the 2nd is deemed to be a default on the first mortgage as well at which point the 1st mortgagee will take action.

One downside of foreclosure- it takes a long time (think months and years and not days and weeks) to do even if it is a private action.

If a mortgagee defaults on the second mortgage but is up to date on the first, you are entitled to pursue a Power of Sale. That is one of the rights the mortgagee has regardless of position.

FP

Not a 100% great experience, but working out so far (more details to come).

FB

Credit applications are a must.

Q

Other risks could be a lowering of the value of the house (it can happen) so your 80% LTV rule might not hold up.

Another problem could be the owner getting more secured loans after you do your deal which would also invalidate the 80% rule.

Seems like they are working out for Qcash.

Mike

You’re right. Generally, lenders won’t allow borrowing whatever they are requiring for the down payment. But, the second mortgage might nevertheless show up because 1. the second is not to meet down payment requirements of the lender but rather as a buyer-perceived easier way to buy the house from the investor (e.g. the lender might offer an 80/10 first/second mortgage combination of purchase loans. The only DP requirement is the 10%, which can’t be borrowed. Investor-seller carries the 10% second instead of the bank); 2. buyer just doesn’t tell and may be violating the mortgage terms (although lenders will probably do nothing about it, such as exercise a call on the first mortgage–I imagine this is the most frequent); 3. the second mortgage borrower himself may be an investor rather than owner-occupant. In the last category, the DP requirements are not necessarily going to follow the owner-occupant underwriting rules. This happens quite a bit with investment property (i.e. multi-families where there is not much of a retail owner-occupant market).

I imagine the opportunity to purchase second mortgages has been limited somewhat by the sustained low mortgage interest rates and lower downpayment requirements. It would seem that the second mortgage seller would generally be a prior investor-owner of the real estate who then sold to an owner-occupant and carried a second mortgage to overcome downpayment requirements which might have a higher interest rate because, by necessity, the homebuyer’s need for the second mortgage would arise because the homebuyer would not be able to obtain the entire desired loan amount from the first mortgage (bank) lender. In such a case, where the 80% LTV criteria is met, it probably would arise only in the case where the second was longer term and the house appreciated to reduce the LTV percentage. It would seem that in most such cases the homebuyer would refinance the entire mortgage given lower interest rates or just the second through a more traditional home equity/bank second. But, since people don’t always do the sensible thing, it’s possible that the hypothetical second mortgages are out there.

In answer to the Financial Blogger’s question, I don’t see any way that you could re-qualify the borrower. The seller may have information from the time of the loan albeit dated. The risk evaluation would almost certainly have to come from the LTV criteria, which would be dependent on the second mortgage buyer making sure he has made his own accurate valuation of the property.

OK, sorry this is so long, but it’s an interesting topic.