By Loren Keim
Many home owners are facing the difficulty of dealing with more than one mortgage on their home. In order to transfer the property to a new owner, all liens and mortgages against the property have to be satisfied or released. Whether you are the Realtor assisting the home owner, or you are the home owner, you'll need to negotiate with all parties to complete the short sale.
Negotiating with two or three lenders, rather than one, seems like a daunting task. After all, it took you two and a half hours just to get the first one on the phone. There is a bright side, however. Second and third lien holders, whether they are equity loans, second mortgages or any other liens, typically receive little or nothing if the home is foreclosed by the primary lender. This simple fact may make the lenders more receptive to reduced payoffs (and in some cases, significantly reduced payoffs).
When a foreclosure sale or Sheriff's sale occurs, the property is sold to the highest bidder. Many homes that go to foreclosure do so because the home owner owes more than the home can be sold for in the current market. The holder of the first mortgage or principal mortgage will typically bid on the home as high as the balance on the first mortgage or as high as the amount the mortgage holder believes they can sell the property for, whichever is lower. Lenders bid in this manner in order to recoup the maximum they can from the property.
In many cases, the bid from the first mortgage company or primary lien holder is the highest or winning bid. A Sheriff's Deed or Trustee's Deed is filed to deed the property back to the winning bidder, and the loans are all extinguished from the title. This leads to home equity loans and second mortgages receiving little or nothing from the foreclosure sale.
Example: Property is foreclosed by lender. There is a first mortgage of $180,000 and a second mortgage of $35,000. The lender believes the property may be resold for $200,000. The lender will bid up to $180,000 to insure their loan is repaid through the sale. If others bid above $180,000, the balance is paid to the junior lien holders and then to the owner in that order. If the primary lender is the high bid, the junior lien holders get nothing.
Property Value: $200,000
1st Mortgage: $180,000
2nd Mortgage: $ 35,000
Total Owed: $215,000
Primary lender may bid to $180,000. If the primary lender buys the property back at $180,000, the junior lien holders (second mortgage, home equity loans) get nothing from the sale.
The existence of second and third lien holders may make the negotiation with the first lien holder more difficult because the first mortgage company may believe that they can recoup their entire mortgage in the foreclosure process. All the losses of the short sale may have to be carried by the second mortgage company or any other junior lien holders.
As with any negotiation, the home owner must be prepared to understand that the first mortgage company may reject the offer of a short sale if they believe they can do better through the process of foreclosure. If you, dear reader, are a Realtor advising clients, you must make the client aware of this possibility.
There are three possible options to deal with junior liens. Again, we're defining junior liens as second mortgages, third mortgages, home equity loans, money you owe your second cousin Rudolph, or any other lien behind the primary mortgage on the property.
The first method of dealing with junior liens only applies if the lien is a piggyback loan. A piggyback loan is a second mortgage written by the same lender as the first mortgage or primary mortgage. With piggyback loans, a Realtor or home owner may be able to negotiate with one single mortgage workout person. In some cases, the lender may still have different people work on either loan.
The piggyback loan allows the lender to spread the shortage of payoff over both loans. This allocation of the payoff may allow the lender some benefits on their books.
The second method is to simply negotiate a short payoff, as described under the previous section of the short sale process. The second lien holder will likely have all the same required documentation as the first. This mortgage company will want to see exactly how much they'll be receiving from the sale based on a preliminary HUD settlement sheet from a title company, attorney or escrow agent.
Remember when dealing with the second mortgage holder that they are likely to lose the entire loan if the owner defaults and goes to foreclosure. That may allow you as either the Realtor or owner to negotiate a payoff that is a fraction of what is owed on the loan. The recourse the second mortgage holder has, however, is the possibility of filing a deficiency judgment should the property go to foreclosure, depending on location and applicable laws.
In order to settle a property with a first and second mortgage, the lender needs to understand their bottom line at the end of the transaction. Assuming the sales price is within an acceptable range of the market value, the first mortgage and closing costs to settle must be paid at settlement. The second mortgage holder must be willing to accept what is left as payment for the lien in order for the borrower to close the loan under this scenario.
Example: A home is valued at $200,000 and receives an offer of $200,000. In order to settle the property, closing costs are $13,000 including Realtor fees, transfer taxes, notary and filing fees. An outstanding first mortgage of $170,000 exists and the second mortgage is $50,000.
Sales Price: $200,000
Closing Costs: ($ 13,000)
First Mortgage: ($170,000)
Balance: $ 17,000
In this scenario, the second place mortgage company must be willing to accept $17,000 in lieu of the $50,000 balance on their loan. As with any short sale, an owner should get something in writing from the lender stating that they are accepting this payoff as payment in full for the loan, and that the lender will not pursue civil action for any balance at a later time.
If the lender is unwilling to release the lien at an amount equal to what is left after the first mortgage is paid, as shown in the example above, the alternative is for the home owner to accept a personal note for the difference. At this point, the home owner can elect to file bankruptcy or allow the property to foreclose, but should give serious consideration to their situation.
For more information on the step by step process, check out "Short Sales: Step by Step" at Amazon.com.
Loren Keim is the author of several books including "Short Sales: Step by Step" and "How to Sell Your Home in Any Market"