Friday, February 11, 2011

"Mortgage Assignments vs Sub2"

For the luv of gawd do not do fall for this "mortgage assignment" fad. Traditional Sub2 deals are fine, but assigning a mortgage (transferring title from a seller to a buyer who cannot get a loan, and collecting a fee off the deal, and walking away, is the stupidest, most short-sighted strategy ever.

Imagine with me...(I'm sure the MA gurus have a quick, if not torturous answer for my objections)...
Say, we transfer title to a buyer who cannot, for a variety of reasons qualify for a new loan, and perhaps he puts up as little a 3% of the sale price as a "down payment" on an underwater property... Of course this is a recipe for default, if not severe credit damage the seller, and an abject case for a lawsuit.

Consider a default on a loan by the original borrower... That borrower often squats in his home until the bank either pays him to leave, or the bank agrees to a short sale offer, or the bank modifies his payments, etc.

Either way, the original borrower enjoys free rent (especially since the bank won't even talk with him UNTIL he stops making payments.

Well, what in gawd's name does a defaulted "mortgage assignment" buyer have to lose by sitting in that same house rent free? His credit isn't on the line, and even when the bank forecloses, the foreclosure doesn't show up on HIS credit ...and he can't be evicted until after a trustees sale, which might take a year or two...

So, what's the downside for the buyer if he defaults and then sits in the house rent free for months? Losing a couple thousand in down payment money? Hey, the more he put up, the more incentive he has to be a squatter! After all, he saving many potential thousands of dollars living payment free regardless of what he paid up front.

Bottom line the original borrower's credit is getting screwed six ways from Sunday. Nice.
By contrast, in a traditional "subject to" transaction, the buyers (us) stay with the transaction until our end/user buyer refinances the loan(s), or bails on us.

Either way, our buyers DO NOT get the deed before paying us off first.

At the same time, we protect the original seller/borrower from loss and damage by making sure the loan payment is made regardless of what our end/user buyer is doing.
Frankly, we make more money when our Sub2 buyer bails on us, because we can resell the house for another down payment! This is a professional (and profitable) service we provide to the original seller. We've built a back-end profit into the deal.

With a mortgage assignment, again, the person putting the seller and buyer together (us) walks away once the fees are collected, and the deal is consummated. That's all fine and dandy as long as our buyer doesn't default and/or get stupid by squatting in the property.
In that case, nobody is assisting the buyer in getting financing either. He's on his own.

Sellers rarely have the expertise to assist a buyer in getting financing. That's why sellers rely on real estate agents most of the time to handle this detail. In this deal, we have no incentive to help any further. We've got ours!

Meanwhile, with a Mortgage Assignment, if the buyer either decides he's tired of the property, or can't get a loan (isn't being assisted by anyone like us in getting a loan), and/or has a fight with the seller, and/or decides to screw the seller by not making any more payments ...and finally, just to add insult to injury does NOT move out... what recourse does the seller have?

Well, the seller just evicts the "mortgage assignment" buyer for not paying right? Uh, no. The MA buyer is the TITLE HOLDER. The only entity that has the right to evict a defaulted MA borrower/owner is the lender/lien holder ...and that right only comes after a trustee sale.

So the original borrower is up a creek without a paddle. The original borrower's credit is being screwed AND he can't evict the MA deadbeat from the house.

On the other hand, if we were still in the Sub2 deal, like we should have been, we would be protecting the seller from a Sub2 deadbeat buyer by NOT transferring or assigning the DEED to our buyer before he paid us off. Also, we reserved funds to keep the loan current until we got a new buyer in place.

The MA gurus are saying that escrowing a Grant Deed back to the seller is the insurance policy against a buyer's default. That bogus, if not tenuous alternative, touted by the MA gurus, is ILLEGAL to perform in several states that require judicial foreclosures if ever, and whenever there is a transfer of equitable interest.

This includes Contract For Deeds (in CA). Well, if we have a buyer who actually HAS the title in his name, there's nothing short of a judicial foreclosure that will legally force the MA buyer to abandon the property despite being in default.

So, if we want to make money on pretty, low/no equity homes, we stay in the deals, and DO NOT transfer title to our credit challenged buyers, while at the same time protect the original seller from damage and loss.

Otherwise, we better make sure we do our MA deals behind a corporate entity; plan to be sued and hide our assets, because we WILL be sued by the seller who gets his credit trashed by a MA buyer who defaults and won't pay, and ...won't move.

Mortgage Assignments are the dumbest strategy to hit the creative real estate market in recent history.

Why not just shoot yourself in the mouth right now and save yourself the grief of doing 3 to 5 in Leavenworth after your seller gets a judgment against you for fraud.

Wait! You say? Is a mortgage assignment fraudulent? No.

However, explain to a judge how you didn't take advantage of an unsophisticated seller by "talking" him into transferring his deed to a credit challenged buyer, and collecting a HUGE fee at the seller's expense and ignorance, and later damaged his credit, inhibited his borrowing power, upended his reputation, and thwarted his earning ability.

That'll be interesting testimony.

Stay away from mortgage assigning.

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