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Short Sale Second Lender Situations

By
Real Estate Agent with Samson Properties VA 0225-059831, MD 646410

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.)

Posted by

The Gold Homes Team, LLC. MBA, MSE, MA, CDPE, Associate Broker VA, MD, FL

goldhomesteam.com   va-probate.com

Anonymous
Short Sale in Southern CA

Thanks for the great post!  I am the buyer in the situation you described: We just found out that the first lender has approved the short sale as long as the second lender is willing to accept $1000.  That information has been forwarded to the second lender and we should hear back in a week.  What should we do if the second lender says no?!  (FYI - The 2nd lender originally asked for 10% of the proceeds of the sale, which would amount to about $50K -- and the 2nd loan is about $250K). 

What is our best option(s)?  Help!

Oct 14, 2009 12:01 PM
#1
Anonymous
Jim Gilbert

Dear Short Sale in Southern CA,

 

Disclaimer: I am not licensed in CA. Talk to your agent; if that doesn't help talk to his/her broker.

My consistent recommendation for those willing to offer on short sales is that short sales are for those who are (1) patient, and (2) willing to eventually succeed on some property but not really attached to a particular property.  Hence if this one doesn't work out you move on to your second choice.

The buyer has no leverage in this situation. Nor does the selling (buyer's agent), nor does the listing agent, except possibly for one option now available since August 14, 2009:

Note the per the U.S. Treasury's revised HAMP guidelines issued August 14, 2009, which now cover junior loans whether second mortgages or Home Equity Lines of Credit, IF the first lender is a HAMP participant and they approve a loan modification for the homeowner and the 2nd lender is also a HAMP participant the 2nd lender is now forced to accept one of two kinds of modifications to their junior loan (without even being consulted!) if the first lender modifies the loan to avoid foreclosure/deed in lieu/short sale.

Why is this interesting?  Well, if it applies to the situation at hand the seller and listing agent can point out to the uncooperative 2nd lender that if the 1st lender mods the loan their loan will get mod'ed also LIKE IT OR NOT! on terms approx equal to a short sale, and WITHOUT the homeowner vacating or having to declare bankruptcy.  This might persuade a 2nd lender to cooperate.  This angle only works if both loans are held by HAMP participants, e.g. Citi holds the 1st and B/A holds the 2nd.

Good Luck!

Jim Gilbert

Associate Broker

RE/MAX Olympic

Oct 14, 2009 12:23 PM
#2
Anonymous
Andi

I am in the process of buying a house that is a short sale.  We were set to close in two weeks and it was somehow just discovered that there are two loans.  One for 59k and one for 179k.  We got bank approval from the lender of the 59k loan.  The newly discovered other lender wants 179k. (My accepted offer was for 137k).  The most confusing part is that Wells Fargo is the bank for both of the loans!  How can they approve it, and then a few weeks later say they want 179?  Not to mention the house appraised at 165k and is listed at 159k. 

If Wells Fargo accepted my offer.. can't I hold them to it?  I really appreciate any help you can give!

Dec 14, 2010 02:55 PM
#3
Anonymous
Jim Gilbert

Hi Andi,

Thanks for your comment and query!

I strongly suspect you made your offer using an agent. If so you need to be asking these questions of your agent.  It is a violation of the NAR Code of Ethics for me to directly consult with the clients of another Realtor(R).

If (a) you are purchasing property in the Commonwealth of Virginia, AND (b) you are not working with an agent, then you may call contact me directly via email for specific consultation. I am not licensed in other jurisdictions and I do not want to step on the toes of another agent.

The comments below reflect my general understanding of short sale situations, not your particular one.

In general it is the responsibility of the listing agent handling a short sale to have a title/escrow/settlement company prepare a preliminary HUD-1 settlement statement to be submitted to the seller's lender(s) as part of the short sale package submitted.  Without having a HUD-1 in hand no lender will even evaluate a short sale proposal.

* It is the agent's responsibility to ask the seller to disclose all existing first, second, third, etc. mortgages (or deeds of trust) and any HELOC loans. Failing to ask is not a violation of law or ethics; it is just wastes time later.

* It is the seller's responsibility to answer truthfully. Failing to answer truthfully is not a violation of law or ethics. It does waste everyone's time later.

* It is the agent's responsibility to direct the title company to research all actual and potential liens on the seller's property including mortgages/deeds of trust, HELOCs, unpaid property taxes, and unpaid HOA/condo fees so that all these items can be included on the HUD-1. The title company gets the mortgage/HELOC liens from the tax records, the property tax information from the tax collector, and the HOA information from the HOA.  If the title company fails to perform as directed they risk having that agent's business being taken elsewhere next time. Failing to find a recorded lien during a search is a mistake, not liability.  

* Liability comes if a title company sells title insurance insuring clear title when there is in fact a cloud on the title.  This would only occur at an actual closing and would create considerable liability for both the title company and the title insurer.  The fundamental business of title companies is to research title, create clear title for conveyance, and sell the title insurance to the new owner based on the verified clear title. They take this *REALLY* seriously.

* Discovery of a lien late in the game is unpleasant. The unpleasantness does not carry liability for the lienholder. A recorded lien is an obligation of the seller. It clouds the title. Without clear title the property cannot be conveyed. When one lien holder says they will remove their lien for a net payoff amount of $X that does not oblige another lien holder (including themselves) to agree to remove the other lien for any particular amount.

* Without all liens cleared from the title the title company will not be able to underwrite title insurance for the new buyer and no sale will close.  

I am not an attorney, nor an IRS enrolled agent, nor a real estate agent anywhere but Virginia, not your agent. "Your mileage may vary."

 

 

Dec 15, 2010 03:14 AM
#4