Short Sale Second Lender Situations
Copyright (c) 2009 Deanna & Jim's GOLD Team, RE/MAX Olympic
Homeowners challenged to keep up with their mortgages due to changes in circumstances often elect to list their home as a short sale in order to prevent inevitable foreclosure. Short sales involving two banks are allegedly more challenging to complete. This article explains the situation and offers suggestions to both buyer and sellers considering such a transaction.
Short sales are negotiated settlements where the sales contract between the buyer and the seller is contingent on approval by third parties - the existing holders of the first mortgage and the second mortgage (or home equity line of credit (HELOC)) on the property. The home is listed and sold for (low) current market value. The seller gets zero. Even with the seller getting nothing the amount available to pay off the existing first and second liens is less than the amount owed. This "short" payoff is why it is called a short sale.
Short sales involving only one loan are the simpler case and are not covered here. Short sales involving two loans with the same bank appear to the buyer and seller to be almost as if there was only one loan. In both cases only one third party needs to approve the transaction for it to go forward.
Short sales with the first loan held by one bank and the second loan (or HELOC) require the approvals of two third parties, specifically the two loan servicers. The net proceeds are the sales price less all the seller-side closing costs except paying off the servicers. The problem the first lender has is that they cannot go forward with the transaction unless the second lender removes their lien on the property. The problem the second lender has is that the prime alternative available to the first lender is to simply foreclose, which will almost always result in the second lender getting nothing.
In this market area transactions are typically structures where the second lender is offered $1000 to remove their lien and let the deal go forward, and the first lender gets all the net proceeds except the $1000. Some second lenders will attempt to get more than $1000, perhaps 1% of the sales price. Some second lenders will attempt to require the seller to sign a promissory note at settlement agreeing to pay some or all of the "forgiven" second mortgage debt.
The prime threat available from the seller, and also the first lender, with which to "reason" with the second lender is "OK, we'll just let it foreclose and you will get nothing."
Foreclosure is almost always an inferior alternative to both servicers. The second lender will usually get their position wiped out and the first lender will be stuck with a house which may take them 90 days to a year to pry the occupants from, meanwhile making the payments of property taxes, HOA dues if any, and all expenses required to keep the property secure and maintain its value (lawn maintenance, winterization and dewinterization of plumbing systems, etc.). Foreclosure also generates non-trivial attorney fees for both first and second lenders.
Although the second lender will usually eventually go along with the proposed short sale rather than see the house foreclose they may require their own loss mitigation department to go through as extensive and thorough a review of the situation as if they were in first position. An entire seller's hardship package will have to be filed with the second lender and evaluated. And this package must go through the same delay waiting to be reviewed by a negotiator as the package for the first loan did.
It is the job of the short sale listing agent in the case where there are two loans to make sure that both hardship packages are completed in full and submitted in parallel. The first lender's negotiator may only provide a limited period of time for the second lender to respond, and the second lender's loss mitigation department - like all loss mitigation departments, may not be disposed to considering cases out of order.
Buyers considering short sale purchases should always have their agent find out "One bank or two? How far are they in the process with each bank?" when considering making an offer. Buyers with inflexible calendar deadlines should not be shopping for short sales, particularly those involving two banks.
Short sellers with two liens should be prepared to prepare two complete hardship packages, one for each servicer. Fortunately the contents of the two packages will be nearly identical.
Achieving success in a short sale involving two banks is very possible and is routinely accomplished by experience short sale agents. The key for both buyers and sellers is to use a real estate agent experienced with short sale and bank-owned transactions.
(Deanna & Jim's GOLD Team has handled over 350 transactions in the last 8 years, over 130 bank-owned transactions in the last 18 months, and numerous successful buyer and seller side short sales.)
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