Short Sales Held Hostage By Junior Lien Holders

Short Sales Held Hostage By Junior Lien Holders

Short Sales Held Hostage By Junior Lien Holders

Are 2nd Lien Holders Killing Most Short Sale Deals?

While everyone including the banks and economists keep pushing the fact that short sales remain de rigueur as opposed to foreclosures, they overlook that many uncooperative 2nd lien holders (and sometimes 3rd lien holders) hold the participants in a short sale hostage until often it fails.

Short sales may be a popular and useful tool for homeowners to exit a home in a situation that benefits all sides but the fact that about 60-70% of short sales fail. They fail due to several factors including the real estate listing agent not structuring the deal correctly at the outset but also due to many second lien holders being unreasonable with their 2nd lien demands.

We have heard from several sources (short sale agent, negotiators) that several mid-level banks issue unreasonable requests for 2nd lien settlements. Sometimes they ask for 50% of the original loan and don’t budge. Even worse scenarios occur when the banks charge off or sell their 2nd lien to a collection agency or attorneys who often don’t take into consideration the present value of the property, the homeowner’s hardship or the condition of the property.

HAFA And 2nd Lien Holders

To address this issue, the HAFA program recently increased payments for second lien holders who agree to release borrower liability, lifting the maximum settlement to $8,500 from $6,000. Unfortunately, many homeowners still do not qualify for HAFA or both lien holders do not participate in the HAFA program.

So, while banks continue to make bold statements that they willingly participate in speeding up the short sale process, many continue to offer only $3000-$5000 to payoff the 2nd.  If a 2nd lien holder refuses to budge then the amount of money necessary to satisfy the 2nd must come from somewhere (buyer, seller) or the deal will fail.

Sure, banks, collection agencies and lawyers should be entitled to make a fair return on their “investment” but often it comes at the overall expense and health of the economy.

We wouldn’t be surprised (especially here in California) to see a legislator initiate a new bill that prohibits 2nd lien holders from creating “hostage” situations and essentially killing the numerous short sales.

Short Sales Held Hostage By Junior Lien Holders

Short Sales Held Hostage By Junior Lien Holders

Short Sales Held Hostage By Junior Lien Holders


Filed under Banks, California, short sales

2 responses to “Short Sales Held Hostage By Junior Lien Holders

  1. Pingback: Running A Preliminary Title Report For Short Sale Buyers | Resource Blog

  2. Pingback: Short Sale Awareness For Homeowners And Investors | Resource Blog

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