By November 7, 2011 Read More →

American Chopper — Foreclosure Vs. No Foreclosure

So which is it: Was the Orange County Chopper world headquarters foreclosed or not?

The answer as derived from the American Chopper TV show and public information is very simple: Both.

Let’s start with foreclosure. It’s plain that a foreclosure action was initiated by the lender, the GE Commercial Finance Business Property Corp.

The matter is openly discussed by Paul Sr. on the show. He raises such ideas as renting another facility, moving to another building he owns or building a new structure nearby. The local Times Herald-Record explains that loan payments of more than $100,000 had been missed as of June 1, 2010. (See: Orange County Choppers’ HQ faces foreclosure, Nov. 18, 2010)

Minutes from the Orange County Industrial Development Agency discuss the possibility of a smaller replacement building.

So if a property is foreclosed doesn’t that mean the borrower is soon tossed out?

Actually, no. Not always.

It’s in the interest of neither the lender nor the borrower to go through with a foreclosure, especially in many of today’s major foreclosure centers. The fact that a property has been “foreclosed” — that payments have been missed and foreclosure notices sent out — does not mean it will be lost.

There are a number of possible solutions to the foreclosure problem. For instance:

  1. The lender and borrower can attempt to “cure” the loan. As one example, HUD reported that for fiscal 2009 the FHA had a “82.7 percent cure rate for properties 90 days or more delinquent.”
  2. A cure can be created by bringing the loan current or moving unpaid money to the back of the mortgage; that is, making the loan term longer.
  3. Another approach is to modify the loan by reducing the interest rate, forgiving principal, waiving penalties and fees or some combination of changes. Modifications have been used successfully by more than 720,000 residential borrowers under the government’s Making Home Affordable program.
  4. If the lender will go along, the borrower can give up title — and then rent back the property. A deed-in-lieu of foreclosure with a rent-back allows the borrower to stay in place while generating income for the lender. This is the system behind Fannie Mae’s Deed for Lease progrtam. (When values are rising and foreclosure is not an issue, the better strategy is to sell the building and then rent it back — a sale and leaseback.)

Lenders would like to avoid foreclosures if possible because they can produce the most expensive outcome. To avoid that high-cost outcome lenders will sometimes agree to a short sale if the loss will be less than with a foreclosure.

For borrowers, foreclosure is a lousy choice, especially if the lender can go after not only the property but also your equipment and other assets. Credit will be damaged and the ability to get another loan will be impacted.

What happened between OCC and its lender is thus far a private matter. The objective fact is that something was worked out, maybe one of our options, maybe something else. (And, as I have mentioned elsewhere online, maybe there will be a lender theme bike to settle the matter…).

Meanwhile, at Paul Jr. Designs the approach is different. The property is rented.

Was it better for Junior to rent or for Senior to own? It’s years too early to answer that question, but Paul Sr. has been smart to have a world headquarters building that could showcase his custom motorcycle business and TV show while Paul Jr. was right to start with a rental since he may need more space in the future for his bikes, trikes and designs.

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