What is a second mortgage note?

A second mortgage is a type of subordinate mortgage made while an original mortgage is still in effect. In the event of default, the original mortgage would receive all proceeds from the property’s liquidation until it is all paid off.

Since the second mortgage would receive repayments only when the first mortgage has been paid off, the interest rate charged for the second mortgage tends to be higher, and the amount borrowed will be lower than that of the first mortgage.

Using a mortgage calculator is a good resource to budget these costs.

What does it mean to take out a second mortgage? When most people purchase a home or property, they take out a home loan from a lending institution that uses the property as collateral. This home loan is called a mortgage, or more specifically, a first mortgage. The borrower must repay the loan in monthly installments made up of a portion of the principal amount and interest payments. Over time, as the homeowner makes good on their monthly payments, the home’s value also appreciates economically.

The difference between the home’s current market value and any remaining mortgage payments is called home equity. A homeowner may decide to borrow against their home equity to fund other projects or expenditures. The loan they take out against their home equity is a second mortgage, as they already have an outstanding first mortgage. The second mortgage is a lump-sum payment made out to the borrower at the beginning of the loan.

Like first mortgages, second mortgages must be repaid over a specified term at a fixed or variable interest rate, depending on the loan agreement signed with the lender. The loan must be paid off first before the borrower can take on another mortgage against their home equity.

Some borrowers use a home equity line of credit (HELOC) as a second mortgage. A HELOC is a revolving line of credit that is guaranteed by the equity in the home. The HELOC account is structured like a credit card account in that you can only borrow up to a predetermined amount and make monthly payments on the account, depending on how much you currently owe on the loan.

As the balance of the loan increases, so will the payments. However, the interest rates on a HELOC and second mortgages, in general, are lower than interest rates on credit cards and unsecured debt. Since the first or purchase mortgage is used as a loan for buying the property, many people use second mortgages as loans for large expenditures that may be very difficult to finance. For example, people may take on a second mortgage to fund a child’s college education or purchase a new vehicle.

To qualify for a second mortgage, you will need to meet a few financial requirements. You will need at least a credit score of 620, a debt-to-income (DTI) ratio of 43%, and a decent amount of equity in your first home. Because you are using the equity in your home for the second mortgage, you will need to have enough to not only take out your second loan but also be able to keep approximately 20% of your home’s equity in the first mortgage.

It may be possible to borrow a hefty amount of money with a second mortgage. Second mortgage loans use your home (presumably a significant asset) as collateral, so the more equity you have in a home, the better. Most lenders will allow you to borrow at least up to 80% of your home’s value, and some lenders will let you borrow more. You have to borrow enough money to cover your first and second mortgages as well.

Like all mortgages, there is a process for obtaining a HELOC or a home equity loan, and the time line may vary. You will need to apply for an appraisal of your home, and it usually takes the lender’s underwriter a few weeks to review your application. It could be four weeks, or it could be longer, depending on your circumstances.

Just like the purchase mortgage, there are costs associated with taking out a second mortgage. These costs include appraisal fees, costs to run a credit check, and origination fees.

Although most second-mortgage lenders state that they don’t charge closing costs, the borrower still must pay closing costs in some way—the cost is included in the total price of taking out a second loan on a home.

Since a lender in a second position takes on more risk than one in the first position, not all lenders offer a second mortgage. Those that do offer them take great steps to ensure that the borrower is good to make payments on the loan. When considering a borrower’s application for a home equity loan, the lender will check whether the property has significant equity in the first mortgage, a high credit score, stable employment history, and a low debt-to-income ratio.

Taking out a second mortgage means you can access a large amount of cash using your home as collateral. These loans often come with low interest rates, plus a tax benefit. You can use a second mortgage to finance home improvements, pay for higher education costs, or consolidate debt.

However, the risks of taking out a second mortgage are neither unsubstantial nor inexpensive. Expect to pay closing costs, appraisal fees, and credit checks during the process, and you run the risk of losing your home if you can’t make payments.

Home equity loans are another term for a second mortgage. As opposed to a home equity line of credit, which has a revolving credit limit, home equity loans are paid out in lump sums with fixed repayment terms. Both products use the original property as collateral to make it a secured loan and come in secondary priority to the primary mortgage in the event of a foreclosure.

If you qualify for a second mortgage, it can help you pay for home improvements and major renovations, make a down payment on a second home, or pay for your child’s college. Second mortgages can also be a method to consolidate debt by using the money from them to pay off other sources of outstanding debt, which may have carried even higher interest rates.

Because the second mortgage also uses the same property for collateral as the first mortgage, the original mortgage has priority on the collateral should the borrower default on their payments. If the loan goes into default, the first mortgage lender gets paid before the second mortgage lender. This means that second mortgages are riskier for lenders that ask for a higher interest rate on these mortgages than on the original mortgage.

Second mortgages, commonly referred to as junior liens, are loans secured by a property in addition to the primary mortgage.[1][2] Depending on the time at which the second mortgage is originated, the loan can be structured as either a standalone second mortgage or piggyback second mortgage.[3] Whilst a standalone second mortgage is opened subsequent to the primary loan, those with a piggyback loan structure are originated simultaneously with the primary mortgage.[4][5][6] With regard to the method in which funds are withdrawn, second mortgages can be arranged as home equity loans or home equity lines of credit.[7] Home equity loans are granted for the full amount at the time of loan origination in contrast to home equity lines of credit which permit the homeowner access to a predetermined amount which is repaid during the repayment period.[8]

Depending on the type of loan, interest rates charged on the second mortgage may be fixed or varied throughout the loan term.[9] In general, second mortgages are subject to higher interest rates relative to the primary loan as they possess a higher level of risk for the second lien holder.[10][11][12] In the event of foreclosure, in which the borrower defaults on the real estate loan, the property used as collateral to secure the loan is sold to pay debts for both mortgages.[10][13][14] As the second mortgage has a subordinate claim to the sale of assets, the second mortgage lender receives the remaining proceeds after the first mortgage has been paid in full and therefore, may not be completely repaid.[15] In addition to ongoing interest repayments, borrowers incur initial costs associated with the origination, application and evaluation of the loan.[9] The charges related to the processing and underwriting the second mortgage are referred to as the application fee and origination fee respectively. Borrowers are also subject to additional costs which are charged by the lender, appraiser and broker.[16]

When refinancing, if the homeowner wants to refinance the first mortgage and keep the second mortgage, the homeowner has to request a subordination from the second lender to let the new first lender step into the first lien holder position. Due to lender guidelines, it is rare for conventional loans for a property having a third or fourth mortgage. In situations when a property is lost to foreclosure and there is little or no equity, the first lien holder has the option to request a settlement for less with the second lien holder to release the second mortgage from the title. Once the second lien holder releases themselves from the title, they can come after the homeowner in civil court to pursue a judgement. At this point, the only option available to the homeowner is to accept the judgment or file bankruptcy.

Second mortgages come in two main forms, home equity loans and home equity lines of credit.[3] A home equity loan, commonly referred to as a lump sum, is granted for the full amount at the time of loan origination.[8] Interest rates on such loans are fixed for the entire loan term, both of which are determined when the second mortgage is initially granted.[17] These close ended loans require borrowers to make principle-and-interest repayments on a monthly basis in a process of amortisation.[18] The interest repayments are the costs associated with borrowing whilst the principle paid reduces the loan balance.[19] With each subsequent repayment, the total amount remains constant however the portion related to the interest cost decreases whilst the amount corresponding to the principle increases.[20] This ensures the loan is completely paid off at the end of the payment schedule. Home equity loans are commonly used for debt consolidation or current consumption expenditures as there is generally lower risk associated with fixed interest rates.[17]

Home equity lines of credit are open ended loans in which the amount borrowed each month may vary at the homeowner's discretion.[8] These loans offer flexible repayments schedules and are subject to variable interest rates that may potentially increase or decrease during the loan term.[21][22] Borrowers have access to the line amount which is predetermined at the time of loan origination but are not required to draw amounts if they do not wish to.[23] The revolving credit facility provides borrowers the flexibility of drawing down amounts only when required to avoid interest on unnecessary credit. This ensures a minimum debt level is maintained as monthly repayments correspond only to the amounts used rather than the full amount available. Home equity loans are commonly used when borrowers anticipate future consumption expenditures as well as credit shocks which affect access to credit in the future.[8]

Second mortgages can be structured as either a standalone deal or a piggyback loan.[4] Standalone second mortgages are opened subsequent to the primary mortgage loan to access home equity without disrupting the existing arrangement.[24] Typically, the home buyer purchases a primary mortgage for the full amount and pays the required 20 percent down payment.[5] During the loan term, monthly mortgage repayments and appreciating real estate prices increase the property's equity.[25] In such instances, standalone second mortgages are able to use the property's equity as collateral to access additional funds.[13] This financing option also offers competitive interest rates relative to unsecured personal loans which reduce monthly repayments.[26] With reference to unsecured personal loans, lenders are exposed to a greater level of risk as collateral is not required to secure or guarantee the amounts owed.[27] If the borrower were to default on their repayments, the lender is not able to sell assets to cover the outstanding debt.[28] Accordingly, second mortgages not only ensure access to greater amounts but also lower interest rates comparative to unsecured loans. With increased cash flow, second mortgages are used to finance a variety of expenditures at the discretion of the borrow including home renovations, college tuition, medical expenses and debt consolidation.[9][29]

Piggyback second mortgages are originated concurrently with the first mortgage to finance the purchase of a home in a single closing process.[30] In a conventional mortgage arrangement, homebuyers are permitted to borrow 80 percent of the property's value whilst placing a down payment of 20 percent.[31] Those unable to obtain the downpayment requirement must pay the additional expense of private mortgage insurance (PMI) which serves to protect lenders during the event of foreclosure by covering a portion of the outstanding debt owed by the buyer. Hence, the option of opening a second mortgage is specifically applicable to buyers who have insufficient funds to pay a 20 percent down payment and wish to avoid paying PMI.[5][32] Typically, there are two forms in which the piggyback second mortgage can take. The more common of the two is the 80/10/10 mortgage arrangement in which the home buyer is granted an 80 percent loan-to-value (LTV) on the primary mortgage and 10 percent LTV on the second mortgage with a 10 percent down payment.[33] The piggyback second mortgage can also be financed through an 80/20 loan structure. In contrast to the previous method, this arrangement does not require a down payment whilst still permitting home buyers 80 percent LTV on the primary mortgage and 20 percent LTV on the second mortgage.[34]

Varying interest rate policies apply to different types of second mortgages. These include home equity loans and home equity lines of credit.[17] With regard to home equity loans, lenders advance the full amount at the time of loan origination. Consequently, homeowners are required to make principle-and-interest loan repayments for the entire amount on a monthly schedule.[9] The fixed interest rate charged on such loans is set at the time of loan origination which ensures constant monthly repayments throughout the loan term. In contrast, home equity lines of credit are open-ended and based on a variable interest rate.[22] During the borrowing period, homeowners are permitted to borrow up to a predetermined amount which must be repaid during the repayment period.[8] Whilst variable interest charges may permit lower initial repayments, these rates have the potential to increase over the duration of the repayment period. Second mortgage interest rate payments are also tax deductible given certain conditions are met.[35] This advantage of second mortgages reduces the borrower's taxable income by the value of the interest expense.[36] In general, total monthly repayments on the second mortgage are lower than that of the first mortgage. This is due to the smaller amount borrowed in the second mortgage compared to the primary loan rather than the difference in interest rate. Second mortgage interest rates are typically higher due to the related risk of such loans.[10] During the event of foreclosure, the primary mortgage is repaid first with the remaining funds used to satisfy the second mortgage.[5][12] This translates to a higher level of risk for the second mortgage lender as they are less likely to receive sufficient funds to cover the amounts borrowed.[4] Consequently, second mortgages are subject to higher interest rates to compensate for the associated risk of foreclosure.[15]

Second mortgagors are subject to upfront fees associated with closing cost of obtaining the mortgage in addition to ongoing payments. These include application and origination fees as well as charges to the lender, appraiser and broker.[9] The application fee is charged to potential borrowers for processing the second mortgage application. This fee varies between lenders and is typically non-refundable. The origination fee is charged at the lender's discretion and is associated with the costs of processing, underwriting and funding the second mortgage.[37] Also referred to as the lender's fee, points are a percentage of the loan that is charged by the lender.[38] With each point translating to one percentage of the loan amount, borrowers have the option to pay this fee in order to decrease the loan interest rate.[39] Whilst paying points increases upfront payments, borrowers are subject to lower interest rates which decrease monthly repayments over the loan term.[40] Second mortgages are dependent upon the property's equity which is likely to vary over time due to changes in the property's value. Professional appraisers who assess the market value of the home result in an additional cost to potential borrowers.[41] A broker fee, associated with the service of providing advice and arranging the second mortgage, is also incurred by borrowers.[42]

Escalating real estate prices are common in low interest rate environments which increase borrowing capacity, in addition to lower underwriting standards and mortgage product innovation that provide greater access to credit.[43] These factors contribute to an increase in real estate demand and housing prices. The implication of such environments is the increase in cost of purchasing a property in terms of down payments and monthly mortgage repayments.[44] Whilst conventional primary mortgages permit home buyers to borrow up to 80 percent of the property's value, they are conditional on a 20 percent down payment.[4] Home buyers who have insufficient funds to meet this requirement must pay primary mortgage insurance (PMI) in addition to interest on the primary loan.[45] This expense can vary in cost depending on the size of down payment, credit score and type of loan issued.[46] For this reason, second mortgages are particularly attractive in appreciating housing environments as they permit home buyers with a less than 20% down payment to borrow additional amounts to qualify for a primary mortgage without the purchase of PMI.[6] These non-traditional mortgage products can decrease the cost of financing a home or enable homebuyers to qualify for more expensive properties.[47] From a lender's perspective, increasing real estate prices create the incentive to originate mortgages as the credit risk is compensated by the increasing value of the property.[35] For the same reason, existing homeowners have access to greater home equity, which can be used as a source for additional funds by opening a second mortgage. In aggregate, as the prices in the real estate market continues to rise, the demand for second mortgages and other non-traditional mortgage products tends to increase.[25]

Lower interest rates increase the capacity to sustain a given level of debt, encouraging homeowners to withdrawal housing equity in the form of second mortgages.[43] Specifically, lower interest rates reduce the interest charged on loans and decrease the total cost of borrowing.[25] In the context of mortgage markets, this translates to reduced monthly mortgage payments for homeowners and additional incentives for potential home buyers to increase borrowing.[48] This affects the loan amount granted in addition to the number of applicants who qualify for higher levels of debt. With respect to a decreasing interest rate, low-income home buyers who were previously ineligible, are able to qualify for cheaper home loans despite higher debt-to-income levels.[49]

Prior to financial deregulation in the 1980s, the Australian mortgage market was dominated by a small number of banks and lending institutions.[50] This imposed limited competitive pressures as the financial system was closed to foreign banks and offshore transactions.[51] Due to stringent regulatory practices in the 1960s, banks were competitively disadvantage relative to non-bank financial intermediaries which led to a loss in market share.[50] This continued until the mortgage market was financially deregulated in the 1980s which permitted banks to operate more competitively against finance companies, merchant banks, and building societies.[52] Following this, the mortgage market was additionally exposed to international competition which granted greater levels of credit to financial institutions.[50] During this period the use of financial brokers between borrowers and lenders increased as mortgage brokers entered the market. This component of the non-banking sector grew significantly during the 1990s and contributed to 10 percent of all housing loans written.[47] Due to high real estate demand, housing loans became extremely profitable which increased competition for incumbent banks.[53] Whilst existing lenders began to offer honeymoon loans with discounted interest rates for the first year, they were hesitant to lower standard variable rates as this would decrease interest rates on existing loans.[54] In contrast, mortgage brokers utilised securitisation to obtain cheap funding and offer rates 1 to 1.5ppt lower than existing lenders. By originating loans and selling them to securities, mortgage brokers obtained commissions and fees for origination without retaining the risk of low quality loans.[55] This created strong financial incentives to originate large volumes of loans regardless of the risk and was reflected in the minimal entry qualifications for participants, the use of commissions for the remuneration for brokers, lack of accountability and poor advice provided to consumer clients.[55] In combination with poor mortgage origination standards and practices, the non-banking sector also offered a variety of financial products in excess of traditional loans and mortgages.[56] The products included second mortgages, non-conforming loans, reverse mortgages, share equity mortgages, internet and phone banking, mobile mortgage lenders, redraw facilities, offset accounts and debit cards linked to mortgages.[47] As the growth of financial provision increased, banks were pressured to utilise these products and accept lower margins.

Poor underwriting standards by banks and lending institutions played a significant role in the rapid increase of second mortgages during the early 2000s prior to the Global Financial Crisis (GFC) in 2007.[34] This was heavily influenced by economic incentives and opportunities that arose during the United States housing bubble which encouraged riskier loans and lending practices.[57] Mortgage brokers and lenders offered affordability products with 100 percent LTV. This permitted potential homeowners to purchase properties with zero down payment and limited borrower documentation. Additionally, Fannie Mae and Freddie Mac provided similar deals to low-income borrowers including loans with LTV ratios exceeding 90 percent of the property's value. As lending standards continued to relax, LTV ratios extended to 107 percent which reflected home buyers rolling application and origination fees onto their mortgage loans.[34]

Obtaining a second mortgage is similar to purchasing a home, with the lender requiring a variety of information and documentation to make a decision on the application:

Second mortgages often present potential problems that are not typical with a conventional home purchase.

In order to receive down payment assistance, potential borrowers must meet certain program criteria that are often based on income, occupation and credit score, although the eligibility requirements and the amount of assistance offered varies by state and program. But in a broad sense, here is how down payment assistance loans work:

The term “soft” is used because the loan terms are incredibly favorable to borrowers; in other words, sub-market interest rates, lenient loan terms and even full forgiveness in some instances.

For example, Max applies and is approved for a down payment assistance program in Atlanta. They receive $15,000 to help with their down payment and closing costs. In exchange, a soft second mortgage is placed on their home.

The terms of her second loan are that $3,000 is forgiven each year. If they stay in their home for 5 years, the loan is forgiven in its entirety, or if they sell or refinance before the fifth year, they’ll have to pay back the amount left on this second mortgage.

If you receive a down payment assistance grant (as opposed to a loan), well, that’s great! Free money!

Investing in second mortgages or “junior liens” isn’t a very well-known sector of note investing but can be the most profitable if you buy them direct from the source.

In this post you will discover what makes 2nd mortgages so lucrative and the cheapest places to consistently buy non-performing second mortgages.

You will learn:

If you’ve been looking into investing in notes then no doubt you’ve come across second mortgages as one investment that a lot of people are excited about in this industry.  If you’ve been wondering how seconds work, why people invest in them and what makes them profitable, especially when they’re non-performing, then you’ve come to the right place.

When we talk about a second mortgage we’re talking about a promissory note loan that is in a junior position to a senior note. When we talk about debt being senior or junior this has to do with the priority of the note with regards to pay off especially in the case of default.

There are two types of seconds, your traditional second mortgage, which is amortized over a traditional schedule and is used by some home buyers when they don’t have enough of a down payment.

The other type of loan that’s a second is a HELOC or home equity line of credit, which is a type of debt that is closer to credit card debt than it is a mortgage but nonetheless is secured by the house in a junior position to the first mortgage.

So when we talk about seconds we’re talking about any mortgages or loans that are secured by the property that in terms of lien priority come after the first mortgage.

A non-performing note is a note that hasn’t been paid for 90 days or more. So a non-performing second mortgage is any of these junior liens, HELOCS or seconds which are 90 days or more past due

At first blush it may seem crazy to buy a loan that isn’t being paid and that has other loans that are superior to it. But stay with me, I’m going to try to demonstrate to you why a lot of investors find seconds so attractive.

There are a variety of ways that second mortgage note investors get paid off and make profit. In some cases you’ll modify the loan, you may reduce the principal for your borrower, extend the term, reduce the interest rate, or offer other kinds of relief that allow the borrower to continue to pay and allow you profit.

The second lien holder will also be paid if the property is refinanced or sold. Your loan will have to be taken out, that is to say paid off,before anything can be done with the property. Depending on the market that you’re, in even if the house is foreclosed on by the senior lien holder, you still have a good opportunity to get a return on your investment in places where home values have soared.

Investing in second mortgage notes allows a lot of experience with a variety of cost and more importantly provides huge upside potential because of the dirt cheap pricing of seconds.

Non-performing second mortgages can sell for pennies on the dollar. Quite literally. And that’s how the pricing of non-performing seconds is referred to. For example you might pay $0.06 or $0.12 which means would mean 6 or 12% of the unpaid principal balance on the note.

One of the keys to doing well with non-performing second mortgage note investing is to spread your risk across a number of loans. Typically a second mortgage investor won’t buy just one loan, they buy number of loans knowing that they will not get paid on some of them because the first position will foreclose and there won’t be enough equity but the ones that they do get paid on have such high margins that it more than makes up for the losses.

Non-performing second mortgages are cheap because they’re often not worthwhile for lenders that service them to work through. We’re generally talking about small balance low and mid 5 figure debts.

In many cases the lenders don’t have the same kind of flexibility in their workouts that a private investor would have because institutional investors, like banks and credit unions, are  heavily regulated, while private investors have much fewer regulations with which to contend.

So second mortgage notes are being sold on the cheap because it’s not worth while for the institutional lenders to throw a lot of manpower and resources at collecting the small balance, possibly questionable, debts.

The reason banks want to dump non-performing “second mortgages” or junior liens is because they have a disproportionate negative affect on their balance sheet.

Bear with me here, The reason I dwell on what’s going on underneath it all and on the data is because it’s that knowledge that is going to help make you a professional. If you don’t know why you’re doing what you’re doing then very often you’re not going to do it very well (I want you to do it well ) and beyond that you’re going to miss opportunities.

You could be having a conversation with a workout officer and zzzzoom, stuff she’s saying goes right over your head. You’re wondering what she was talking about, she gets the sense that you DON’T know what you’re talking about or in any case there’s that silent chill that happens when two people fail to connect and then poof… no relatability and you are o-u-t out. So… Consider this guidance from the FDIC website:

WHOAAA, if you read that and it just makes you dizzy and you hate it let’s back up and break it down. Here it is – there are 2 categories of risk for residential liens. Second mortgages (second position mortgages) fall into the second. Now consider this table below. Second mortgages are in the second column. Look it over. I’ll meet you at the bottom of the table.

So this begs (at least) 2 questions.

Risk weighting is just what it sounds like. Some loans are riskier than others and so different “weights” are assigned and those weights then impact the balance sheet and in this case we’re talking about capital adequacy ratios. Banks have to maintain certain levels of capital and you can read more about that here or here.

In short, the calculation puts capital as the numerator and risk weighted assets as the denominator. Therefore the bigger the denominator (the risk weighted assets), the lower the ratio,  – the bigger the drag on CAR (capital adequacy ratio – remember division? denominator down, numerator… nup).

If CAR falls below acceptable levels then red flags are raised, regulators move into the cube next to you and there’s a real risk that you’ll be shutdown if the problem persists (if you’re a bank).

As you can see in the table above, in the far right column (category 2), second mortgages are weighted much higher than first position liens (category 1). At the top end of the scale junior liens are weighted at 200%.

Thus, disposing of troubled second mortgages (junior liens), pound for pound, has disproportionately more positive impact on a bank’s balance sheet.

Banks can cash those juniors out by selling them to you. They recover what capital they can and their ratios improve.

The first step to making money with non-performing 2nd mortgage notes is to find them.

Where you’ll be able to source them from depends on how much capital you have to work with and how much work you’re willing to do.

If you have ready capital and you don’t mind paying a premium for then our first investment strategy might be the right one for you.

Some large private funds, frequently ‘hedge’ funds, will buy pools of non-performing juniors seeking opportunistic returns. They might workout or foreclose on some loans in this pool, carve it up and sell off other pieces to smaller investors. Often then that investor will carve up the pool further and might even sell notes directly to the final buyer.

The challenge with taking this approach to acquiring ‘seconds’ as they’re often referred is 3-fold:

How to Find and Buy Non-Performing Notes from [A-Z]:In this article we cover how to find non-performing notes, how to buy them, you’ll learn some strategies that others take with non-performers and there’s some downloadable bonus material.

As you know banks and credit unions make loans…Sometimes these loans are originated for the express purpose of then selling them on the secondary market, sometimes the loans are originated to be held on the bank’s books as “portfolio” loans.

That is to say “whole loans” (non-securitized) originated and held for the purpose of collecting the payments form the borrower.

Many banks will sell non-performing second mortgages rather than trying to work them out or resolve them internally. Your job then is to find out which banks are selling the types of assets you want to buy, find a decision maker, and then be there when the lender is ready to sell.

How to Buy Notes from Banks [Complete Guide] We created a step-by-step “How-To” guide on buying notes from banks and specifically buying non-performing mortgage notes and real estate notes, direct from banks.

They say in real estate that you make your money when you BUY the property. The same holds true when you’re buying notes. If you’ve overpaid there’s virtually no way to recover your investment.

One way to make a return on your investment is to ‘workout’ the note, that is to say, you get the borrower to start paying again.

When a borrower stops paying on their second mortgage default interest and arrears accrue. Most of the time, part of your workout strategy will include getting the borrower to catch up on the arrears and default interest.

When there’s equity in a property an investor can get a return on his investment by foreclosing on the property. Yes, junior liens mortgages in any position usually have the power to collect monies owed through the foreclosure process. Of course if there’s no equity to cover the second position then foreclosing does not help you get a return because foreclosing lien holders always have to pay superior liens.

What that means is that if you own the HELOC on a property that also has a first position mortgage, a second position mortgage, and back taxes, all of those will have to be paid from the proceeds of the sale BEFORE you will see any money in last position.

Trying to make a business out of trading junior liens is doable but you’re going to have to learn a few thing:

It looks like a lot. And it is.

But the money in trading notes can be HUGE once you figure out what you’re doing.

Arguably, the first step in the note business is to be able to source the assets. Nothing happens until you have “product” to evaluate and bid on.

If you’ve got experience working with banks and you need portfolio information and contacts to grow your business then have a look at BankProspector. If you’re just getting started and have never worked with a bank before then have a look at the Academy. If you’re an investor with more cash than time, then have a look at the Verified Investors Program.

The list of course changes from time to time but this list of banks has junior liens in “nonaccrual”the most troublesome loans on a bank’s books and this is a list of banks with 90+ day late junior liens(also considered non-performing). HELOCs “home equity lines of credit” are also “junior liens” and you can find a list of banks with those 90 days late here and a list of banks with HELOCs in nonaccrual here

This depends on the collateral, who’s selling, the borrower’s status and a host of other factors but you could pay anything from literally a penny on the dollar up to 30+ cents.

Thousands of banks have portfolios with non-performing junior liens

At the time of this writing a little more than $17Billion

A second mortgage or junior-lien is a loan you take out using your house as collateral while you still have another loan secured by your house. Home equity loans and home equity lines of credit (HELOCs) are common examples of second mortgages.