Until recently, working with second mortgage lenders was more difficult than working with first mortgage lenders. While the short sale process itself wasn’t any more difficult, the short sale approval terms were often times not ideal.
In Washington State, in the event of a foreclosure, the foreclosing lienholder (usually the first mortgage lender) is required to forgive the deficiency (their loss). There are some rare exceptions, but I won’t cover those here. The junior lienholders, the non-foreclosing lienholders, are not required to forgive the deficiency. So, when the first lienholder forecloses, all junior liens get released from the property, but the borrower remains liable for the balance of any junior liens (typically the second mortgage if there is one). For this reason, second lienholders often feel like they have more leverage in the short sale negotiations since the second mortgage debt would still remain even after a foreclosure.
Because of this, second lienholders were often reluctant to fully settle the debt on a short sale. Instead, they would offer to release the lien so the property could be sold, but the borrower would still be liable for the debt from the second mortgage. However, we’re now seeing an increasing number of second mortgage lenders agree to fully settle the debt (forgiving the deficiency) if they can get ten percent of the balance from the short sale transaction. We’ve even seen some recently that were willing to settle for five percent. Considering that the first lienholder will typically offer the second lienholder $3,000 or 10% of the second mortgage balance (whichever is less, but it can vary), it often times takes little or no financial contribution from the seller to get the rest of the second mortgage debt wiped out.
This, in my opinion, is one of the biggest advantages of a short sale if you have two mortgages. With a short sale, you have the ability to negotiate with the second mortgage lender and potentially settle the account with little or no money out of pocket.
Authored by David Monroe, Realtor and Short Sale Specialist.
Access Seattle area short sale help and foreclosure resources including selling in foreclosure, and 8 Ways to Avoid or Stop Foreclosure.
Copyright (c) 2011 by David Monroe (Keller Williams Western Realty).
Second Lienholders Easing Up On Short Sales