Non Performing Mortgages

Mon. Jul. 15, 2024

If people owe money to you, and the debt is secured by real estate, and any of these are not making payments as agreed, then this web page is directed to you.

Owners of Defaulted Mortgages


This is a very important area of the law. It is different from state to state, and changes over time. Nothing on this web page, or anywhere on this web site is intended to substitute for the advice of a competent attorney who represents your best interests, and is knowledgeable about the law in your jurisdiction. The information here is general in nature, and is intended only to make the viewer aware of some of the issues associated with these topics. If you need an attorney, but can't afford one, you may be able to get free or discounted legal services. To learn more see our Legal Aid web page.

Cherokee is a for-profit investment company that helps you salvage value from your non-performing assets. We may buy them outright, or on a contingency basis. But the focus of this page is not to sell you, but rather to help smaller NPL owners better understand their circumstances and their options.

This web page is directed at smaller, private Note holders. We presume financial institutions and professional mortgage servicers are well aware of the introductory information on this web page.

A Mortgage is not a debt. A Note is the IOU, the description of the debt. The Mortgage, also known as a Trust Deed or Security Instrument is the document whereby the owner of a property pledges that property as collateral, in case the debt is not repaid. The Mortgage is a lien on the property (when properly recorded).

If the owner of a property pledges the same property to more than one person, or if more than one person has a claim against the property as a result of a judgment or otherwise, then the various liens are organized based on their priority relative to each other, and they are then paid in order.

If you own or manage non-performing assets, deciding how to "get as much as possible" can be a more complex decision than it might initially appear. If you are in this situation, we offer a 3-page outline entitled Structuring & Optimizing the Recovery from Your NPL Portfolio. This outlines the issues you should consider when deciding how to proceed. It helps clarify your objectives, and organizes the process of research and analysis.

Individuals and small investors often become owners of Notes secured by Mortgages as a result of selling real estate and taking back a Note. In other words, when you sold your property, the buyer didn't have enough money to pay in full, and did not get a loan from a traditional bank. When a seller takes back paper, you are letting a buyer pay for the property over time. This is known as Seller Financing. If they default, and stop making payments, your Note becomes delinquent or non-performing.

So in order to understand what your Mortgage is worth, and what your options are, you must first understand the concept of liens and their priority.

If no other mortgages or liens are outstanding on the property when you record yours, your lien is in first position. You will be the first to be paid if the property is sold, after costs and other legal deductions. If there are earlier or superior liens, they get paid first, and you get what's left.

Priority of Liens

For example, let's assume a property is worth $100,000. There is a first mortgage for $80,000, a second (perhaps a home equity loan) for $15,000, and an unpaid tax lien for $5,000. You get a judgment against the owner for $5,000 and properly record the judgment. If this property were sold, the costs of sale come off the top. If these are $5,000, then of the remaining $95,000 the tax lien is paid $5,000, leaving $90,000. Then the $80,000 first mortgage is paid in full, leaving $10,000. The remaining $10,000 goes to the second mortgage, leaving a deficiency of $5,000. The judgment gets nothing.

This is obviously a very simple example. It does not account for many costs, such as legal fees and interest. It doesn't consider Bankruptcy implications such as personal exemptions and trustee fees, or other potential costs, as well as the reduced price that distressed properties usually sell for. But in terms of estimating the value of a security instrument, this scenario gives you an overview as to a typical scenario.

If you subordinated your mortgage to another loan, or if your mortgage was recorded after another security instrument, then your protection is reduced.

Even if you had a first or second mortgage, if the property taxes were not paid, the taxing authority may have recorded a Tax Lien on the property, and it automatically moved to the head of the line, pushing all other liens down a notch.

Was your lien recorded? If someone promises to pay you money, even if the debt is related to real estate, it does not automatically become a security instrument against the property. If the debt was supposed to be secured by real estate, there is a process by which a document called a Mortgage or Trust Deed is created, and then recorded in the public land records at the appropriate county clerk. This process tells everyone else that the owner of the property owes you money, and you have a claim against their property in the event that they don't pay.

Whether you are the original mortgagee, or you came to own the loan (you are the benefitiary) in due course, your rights are essentially the same. Assuming the Mortgage was properly recorded, it is very important that all subsequent owners of the mortgage tell the world, by recording their assignment in the same county clerk's land records as the original mortgage.

The rights of the mortgagee (the borrower is the mortgagor) are defined by law, as well as in the terms of the Note and Mortgage.

So if the mortgagor has stopped making payments, and you have properly made demands that are not being honored, what should you do?

First, consult with an attorney who knows this area of the law, in the jurisdiction of the property. She will probably ask to see all the documents, including the Note, the Mortgage, and any correspondence.

The attorney will probably do some research, including a title search on the property to see what other liens are pending, and a credit and court background check on the borrower(s).

We offer a more detailed discussion about estimating the value of the real estate, and offer some public resources at How to Value a Non-Performing Asset.

After reviewing the results of these investigations, and doing a quick valuation analysis like we did in the Priority of Liens example, the attorney will advise you how to proceed.

You will have to pay your attorney for the costs of the research, even before you begin any collection action or lawsuit. Then you will have to pay the attorney a retainer to start a lawsuit.

Sometimes, it simply isn't worth the trouble trying to collect a debt, even if it is secured by a mortgage. Sometimes the debt is too small relative to the collection costs. Often there is not enough equity in the collateral property after deducting all other liens and costs superior to your position.

In many instances, a mortgagee will probably collect a portion of the debt, but not all of it. If your mortgage is not the first mortgage on the property, it is likely that you may not collect anything at all.

When real estate prices are falling, as they have been since 2007, whatever collateral you had actually goes down every month.

After speaking with an attorney, and conducting research on the property and the borrower, and ascertaining the amount you are likely to recover, you need to make a pragmatic business decision whether it's worth the time and effort to sue and try to force the debtor to pay you.

The best solution is always to work something out with the debtor. Perhaps they went thru a tough time, and could begin making payments again. Workouts can include deferring the delinquent payments, reducing payments temporarily, or almost anything else that the parties voluntarily agree to that is legal, and is in their interests. Any time you have to sue, everyone loses. An amicable, negotiated resolution is always the best solution, for everyone.

If you are successful in negotiating an agreement, it is important to document it, using an attorney who will insure it is legally binding, and protects your interests.

You also must make sure that the debtor is represented by an attorney. Even if you are making a great deal for them, it's important that they understand what they are agreeing to, and that they cannot later try to get out of a deal because they didn't have an attorney. So for ethical reasons, as well as to protect yourself legally, you cannot enter into a forbearance agreement without both sides being represented by competent legal counsel.

If the debtor does not have an attorney, and they claim that they cannot afford one, you should refer them to a local source of legal aid. To locate local legal assistance resources see our Legal Aid web page.

Selling Your Non-Performing Assets

If you have exhausted all of the preceding, and if you are interested in discussing the possibility of selling your mortgage, rather than trying to collect it yourself, please call Jay Wolfkind at Cherokee Group at (732) 741-2000.

You can learn more about the benefits of selling a non-performing mortgage, property or tax lien to Cherokee at Why Private Investors Should Sell to Cherokee.

If you own or service delinquent tax liens, please go to Why Private Investors Should Sell to Cherokee.