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This newsletter covers: The loan from Hell! Read this nightmare story about a $1.5 million commercial loan where everything went wrong.

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The loan from Hell! This is a true story and there are valuable lessons for every mortgage broker and lender. Some details have been left out, the whole story is even worse.

In May 2002 Mr. O sought bail-out financing for 2 properties he owned via various corporations in Daytona Beach, Florida. The total he wanted to borrow was $1 million and it was to be secured by 2 properties, one a rented strip shopping center with a claimed value of $600,000, the other a vacant waterfront restaurant with a claimed value of $1.1 million. Allowing for some exaggeration this seemed like a well secured loan.
The day before closing it was determined there was not enough money to pay off the two existing mortgages, both of which were in foreclosure and one of which was due to be sold on the courthouse steps the next day.
Mr. O offered to add on a extra property and increase the loan to $1.475 million. He produced Broker Price Opinions saying that when this property was completed it would be worth $1m. and a contractor's bid for $125,000 to cover the work.
Due to the short time frame there was not time for the lender to check out this property. If they had done so they would have found out, as they later did, that the Broker Price Opinions were based on false information from Mr. O and that the work would cost almost double the estimate.
However, at the time, the lender was not aware of this but they did hold back the $125,000 from the loan closing to cover this work.

First problem, one of the corporations that owned the waterfront restaurant was actually in bankruptcy at the time the loan documents were signed. This meant of course that the loan was invalid. The title company should have but did not find this in their title search. Of course this is their fault and they have liability.

Secondly, as one of the other corporations had been dissolved years earlier, it was decided to quit claim the property from the dissolved corporation to Mr. O personally. Unfortunately the title company did not run ANY title search on Mr. O. If they had done so they would have found out that he had a string of judgments and liens to his name, one of which was an IRS lien for some $200,000. Again the title company is liable eventually for their clear negligence.

One problem with an IRS lien is they have a guaranteed right of redemption for 120 days after a foreclosure sale. They are required to pay the lender what they are owed, but it does mean that the lender can't sell the property until the 120 days is up, without getting a early release from the IRS. In order to have a valid mortgage on the waterfront property the lender had to pay the trustee in bankruptcy $5,000 to ratify the mortgage. Believe it or not, just two hours after reaching this agreement with the trustee, he had a major stroke and ended up in hospital. This entailed a 3 week wait until another trustee was appointed, who did ratify the mortgage.

Meanwhile, Mr. O was not making mortgage payments, not one payment, ever. After hearing his promises that he had the property sold for several months, the lender filed foreclosure. But as the loan had not yet been ratified on the waterfront property, they started with just the properties to which there was no doubt they had a right of foreclosure. There was also a second mortgage on the waterfront property. The second mortgagee also filed foreclosure. By January 2003 foreclosure action was ready for a summary judgment. At which time Mr. O deeded the waterfront property from the corporation to himself and filed personal bankruptcy. This forced the lender, and the second mortgagee, to file a Motion to Lift Stay, as a federal bankruptcy stops all collection actions.

Two months later this was granted by the bankruptcy court and Mr. O dismissed his bankruptcy. The lender proceeded to hold the required sale on the courthouse steps of the strip shopping center property and a Certificate of Sale was issued by the court in April 2003. All that remained was for the Certificate of Title to be issued, about 10 days later.

One day before the Certificate of Title was issued, Mr. O deeded this property also into his personal name, filed bankruptcy again. he then petitioned the court to set the sale aside and cancel the Certificate of Title, which had now been issued.
Although there was no right of redemption for the borrower, the Judge did not understand this and granted Mr. O's motion.

Yet again the lender (and second mortgagee) went back to the bankruptcy court and filed new Motions to Lift the Automatic Stay. The second mortgagee's motion was granted with prejudice, (this means Mr. O could not refile bankruptcy for 6 months) but our lender's motion was dismissed as moot because the bankruptcy court dismissed Mr. O's bankruptcy.

Our lender now asked the court to confirm and reissue the Certificate of Title and they did so. The lender thus now owns the shopping center. (But cannot sell it for 120 days due to the IRS right of redemption.)

The second mortgagee had been given a right to release the waterfront property from the first mortgage on payment of $750,000 at any time before our lender got a Certificate of Title (bad deal for the lender as the property is worth some $900,000 but there was a reason for it at the time).
A hearing for Summary Judgment on our lender's mortgage was set for July 22. The second mortgagee had a sale date set one day earlier. Once title went from Mr. O to the second mortgagee at least our lender wouldn't have to put up with his antics anymore.

What happened was that Mr. O's attorney invested his own money to buy the second mortgage. He then cancelled the sale. This means our lender has the worst of all possible worlds, not only can Mr. O continue to play his ridiculous games, but even when the property is about to be deeded to the lender, he can still redeem it for a discounted value. This would mean that the lender would only just about receive his principal back and no interest.

Luckily our smart attorney spotted a mistake in this game that voided this buy back agreement and threatened to continue the sale.

The end of this story is that the lender agreed to discount the loan interest a little and wipe out the late payment charges. They got paid in full for the principal invested and the legal fees and earned about 12% p.a. for the term of the loan.

How about the title insurance people who screwed up? They do not have to come up with any money until the lender has got the properties back and actually can show they did not recover all their principal and interest. But they eventually paid the lender got about $15,000 compensation.

There are several lessons to be learned here.

First of course make sure the properties are actually worth what the borrower claims they are. Use your appraiser, not his. Second, don't do business with sleazes, even if the deal looks tempting. Check the title yourself if possible. Don't delay to file foreclosure. Even if the borrower says they have the property sold. Don't do a deal with a second mortgagee, or if you do, put a tight time deadline on it. Make such an agreement non-assignable. Employ competent, aggressive attorneys who understand foreclosure law.

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