Why conventionsl wisdom may be wrong...

A recent blog post on Active Rain (click here for the full post) provided some good insights into why a sellers thought that the second mortgage holder should be glad to get whatever is offered to them may not be correct –

- Unbeknownst to the homeowner, his second lien holder bought insurance against his default. They will now collect on that insurance. Depending on the terms, that may not have been possible if they agreed to a short sale.

- The homeowner's loan with them was full recourse, and they now intend to hound him mercilessly for the deficiency and/or sell that right to a collection agency

- The bank in question has a loss sharing arrangement with the FDIC that will allow them to collect substantially more than the pittance offered by the first under the short sale scenario.

The point of the post was a “not so fast” warning that homeowners who base their decision to short sell on the assumption that the second mortgager that they have will be happy to get pennies on the dollar, may be dead wrong.

In most short sale scenarios that I’ve been involved with lately that had a second or even a HELOC in place, it is the second mortgage holder that is objecting to things. That is often caused by the fact that the primary mortgage holder assumes the lead in negotiations and often offers the second mortgager a pittance. The norm in this area is $3,000 to the second mortgage holder. That may work with a HELOPC at a $5-10K range debt range; however, it doesn’t sit well with a company holding second mortgage notes worth $20-30K.

I’m five months into a short sale right now (on the buyer side) where the second note holder wouldn’t budge and required the seller to find a way to pay off the note. Now that it has cleared, we are hopeful that the primary mortgage holder will agree to the terms of the short sale (which will include some back tax issues).
That’s a whole ‘nother issue – back taxes and back utility bills. More and more short sales are taking on familiar aspects of walk-away foreclosure properties. Many short sellers are in the mode of “I ain’t got no money to pay for nothin’ mode.” I’m involved with one of those, too, right now.

So the moral of this story is that a seller must negotiate with all lien holders, if there are two or more, to make sure that everyone is on board and agreeable to a short sale. You can’t just assume that the second (or third) mortgage holder will be happy with pennies on the dollar, just because you think they’ll get nothing otherwise. It turns out that you may be the one to get nothing (or worse).