As if working with one lender isn’t confusing enough, when you throw in two it can compound the time and frustration.

It can also be a good thing.

If you’re a short sale investor, negotiating a second down is a great way to create some room for a quick-turn.  If you are an agent just looking to get a house sold, it’s a good way to get the price down to a number where it will sell.

Here’s the deal…When property goes to foreclosure auction, the first mortgage often does not receive their full payoff; they typically lose money, especially in states where the foreclosure process takes several months and the lender can lose tens of thousands of dollars. When the first mortgage does not receive their full payoff, the second mortgage (if there is one) will received nothing from the foreclosure sale (auction).

For a second mortgage, they are better off getting something rather than nothing. This is why most second and third mortgages, as well as lien holders, will accept 10 percent of what they are owed to payoff the lien.

When working on a property with a first and a second, you will want to send completed packages to both lenders.  Treat the lender in second position just as you would the first: send a package; establish contact with a representative; and wait for the counter offer. 

Like anything else, it’s a matter of timing.  Work toward an approval with the second, even if the first is not ready to give their approval.  Sometimes, the lender in first position will not give an approval until the lender in second position has done so.   If you wait to negotiate with the second until after the approval by the first is in hand, you risk jeopardizing the deal because the second lender may need more time than what the first is willing to give. 

If you find that the first will only work your file once the second has given an approval, have the lender in second position order the BPO. While this is being done, contact the lender in first position and explain that you are currently in negotiations with the second, and ask them to open the file.

When making a counteroffer, send the updated contract with the new purchase price, as well as the HUD1 and a cover letter explaining the offer.

In the past, lenders in first position only permitted $1000 to be given to the second out of the sales purchase; however, today we are seeing that number increase to $3000. 

For Example:

If your contract price is $100,000 (the offer you’ve made to the lender in first position), the first position may only end up netting $90,000 because the following items are subtracted from the “sales proceed” less the $100,000:

Taxes                              $5000
Seller closing costs           $3000
Realtor commission          $2000

Where there is a second mortgage, the first may net $87,000 because they will “allow” $3000 of the sales proceeds to be paid to the lender in second position (shown on line 505 on the seller’s side of the HUD1)

If the lender in second position gives approval for $5000 and no less, put $3000 that the first lender will allow on line 505 and put the remaining $2000 on line 104 (buyers side) that gets added to the amount we (the investor) pay.

Once the first mortgage does their BPO, try to lock down the approval letter from the first mortgage immediately and have them fax it to you. Next, fax the full payoff from the first mortgage plus the short sale approval with the discounted payoff to the 2nd/3rd/liens. It’s okay for the 2nd and or 3rd to see the approval on the first.

Once the junior lien holder realizes that the first mortgage is taking a discount they know they are in trouble. They know that if the property goes to foreclosure auction the chance of them receiving any money is slim.

The full payoff and the discounted payoff are important. That’s the proof that the junior liens need to see to show the potential loss they will incur.

The following is language that can be used when working with junior lien holders, including second and third mortgage holders:

“The first mortgage did a new as-is appraisal and they are going to accept or have accepted less than what’s owed on their first mortgage. If the property goes to foreclosure auction, the first will not get full payoff leaving zero dollars to any junior lien holder.”

“There’s no money remaining for 2nd/3rd/junior liens, so 10 percent of what you are owed is better than zero.  I know 10 percent is not a ton of money, but the first is losing a considerable amount of money. It’s much better than what will happen at auction.”

When in these situations simply make the point about the first not receiving their full payoff which indicates that if the property goes to foreclosure sale than any junior liens will get nothing.

I have worked on many deals where I have paid off the first mortgage in full and just discounted the second mortgage. The same general rules apply here. See if the second mortgage will perform an interior BPO. If they order one then just make sure to validate your offer at the BPO appointment. If the second mortgage will not order an interior BPO they may approve the offer just by having the financial information for the seller.

If the second mortgage is not budging then sometimes I will have my own BPO or appraisal completed. I’ll submit that to the second mortgage along with repairs, pictures and a market analysis.

A Few More Tips:

Understand if a lender in second position pushes the file over to an attorney, negotiations will be difficult.  Expect that any counter offers will come back higher than anticipated, attorneys will counter closer to full payoff. Just continue to gradually increase your offer.

Also, for those lenders that hold both the first and the second, what usually happens is that emphasis will be placed on getting as much as possible on the first, while writing off the second entirely.

Finally, if either Countrywide or National City are in second position, be sure to offer at least $3000 as the initial offer. This is a requirement by both companies for a file to be set-up for review. Otherwise the file may be ignored or dead-filed.