2nd Lien Hold-Out on Short Sale

Q: We have been trying to sell our house as a short sale since we owe more than the home is worth today. We have a second mortgage and we were just told that they have the ability to reject an offer for a short sale. Is this true? We thought only the first had the right to approve a short sale offer.

A: Short answer with a long explanation. The answer to the question, as you phrased it is no, they can not reject an offer for a short sale. But they can prevent you from being able to get a short sale approved and closed.

A second mortgage holder does NOT have the power to approve or reject a short sale offer. However, because you must get their cooperation to either wipe out their lien or at least “lift the lien” for the purpose of closing, they can successfully BLOCK a short sale from moving forward by refusing to do either one of those things.

When there is an attempt to short sale a property which involves a second lien holder, there cannot be a closing unless the second receives the full amount which they are due or a lesser amount which they have agreed is sufficient for them to release the lien which they hold against the property. By releasing the lien, they would be acknowledging that they have no further claim against the home, or the borrower, in exchange for a stipulated amount. It has been commonplace for several years for second lien holders to release the lien for a tiny fraction of the amount owed when it appeared that foreclosure was imminent. This is especially true in a judicial foreclosure state where the second will receive absolutely nothing if there is a foreclosure.

In the past year it has become more common for the second lien holder to try to play hardball and agree to “lift the lien” for the closing on a short sale BUT not to release it. That means that while it is no longer secured by the real estate it remains a collectable debt against the borrower. With such an agreement signed, the borrower has, in fact, re-obligated themselves to the debt. It is possible that such a document, acknowledging the validity of the debt, could be used to secure a judgment. With a valid judgment a lender can request a wage assignment (garnishment).

I always advise borrowers to seek legal advice when it comes to this sort of situation. An attorney might be able to negotiate for a lower amount on the unsecured debt, if, in fact, it is necessary to agree to that in order to avoid foreclosure. Foreclosure should be avoided at all costs.

* Failure to use an attorney could cost you dearly down the road.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Q&A: Deed-in-Lieu Dilemna

Q: My wife and I are behind on our first mortgage. The lender has sent us paperwork which says they are willing to consider taking the house back and would like to ask for a deed in lieu of foreclosure. My question is: what would happen to our second mortgage?

A: This is a question which a lot of people who are struggling with their mortgage payments need to consider.

First, the lender will make a decision as to whether or not they will ACCEPT a deed-in lieu (which allows voluntarily relinquishing the house instead of foreclosing on you) based on whether or not you have a second. Most often, when there is a second mortgage involved, they will decline accepting the deed-in-lieu because their claim to ownership of the property would be encumbered by your second. Essentially, they can say, we don’t want your troubles. This is especially likely to be the case if you took out the second during the past few years and paid off credit card and other debt. In such a case, not only did you convert consumer, unsecured debt, into secured, mortgage debt but you also created a scenario where the investor who is actually carrying the risk on your home does not want to be held responsible for the portion of liability which they did not insure.

Why the lender might still choose foreclosure

Let’s discuss the second thing. Most states’ legal process will allow the 1st mortgage holder to be relieved of any responsibility for the second lien holder’s loss IF THE FIRST FORECLOSES. This caveat means your lender may decide, purely as a business decision, that foreclosure against you is their best option.

As a practical matter, even when a lender has sent you paperwork or indicated that a deed-in-lieu might be an option or you decided to request such resolution to your problem, there is no automatic RIGHT to do this. You will still be required to complete an extensive hardship package to determine whether or not you qualify for the ‘option to give back your house’. In addition to the difficulties tied to having a second loan the lender is required to be sure that you have exhausted all efforts and resources to try to meet your obligation to them.

Deed-in Lieu Warning

While the process is very simple (signing and notarizing a single page document) there are significant risks associated with your future LIABILITY if you do not have an attorney to both prepare the deed-in-lieu document and facilitate a transfer of the property.

Specific risks:

1. Documents never reaching the lender
2. Lender’s failure to record the transfer of the deed in a timely fashion (or ever)
   (becoming very common and a major problem for you if it happens)
3. Possible insurance liability if something happens on the property while
   it is still in your name (Nasty possibility)
4. On-going bills for maintenance or citations from the local health and
   hospital board for health hazards, weeds, etc
5. On-going on home owners’ association dues which could be very costly.

Deed-in-lieu is a slightly better option than foreclosure but should be handled with care and the professional services of an attorney who will address the risks I mentioned above.

FOREWARNED is FOREARMED.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

WORD: Unsecured Debt

And the WORD for Today is:

Unsecured Debt – means a loan which does not have collateral backing the guarantee to repay as promised. Department store charge purchases are examples of unsecured debt. Homes and cars are secured by collateral.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased at www.DovePublishingHouse.com.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Q&A: 2nd Lien Hold-out on Short Sale

Q: We have been trying to sell our house as a short sale since we owe more than the home is worth today. We have a second mortgage and we were just told that they have the ability to reject an offer for a short sale. Is this true? We thought only the first had the right to approve a short sale offer.

A: Short answer with a long explanation. The answer to the question, as you phrased it is no, they can not reject an offer for a short sale. But they can prevent you from being able to get a short sale approved and closed.

A second mortgage holder does NOT have the power to approve or reject a short sale offer. However, because you must get their cooperation to either wipe out their lien or at least “lift the lien” for the purpose of closing, they can successfully BLOCK a short sale from moving forward by refusing to do either one of those things.

When there is an attempt to short sale a property which involves a second lien holder, there cannot be a closing unless the second receives the full amount which they are due or a lesser amount which they have agreed is sufficient for them to release the lien which they hold against the property. By releasing the lien, they would be acknowledging that they have no further claim against the home, or the borrower, in exchange for a stipulated amount. It has been commonplace for several years for second lien holders to release the lien for a tiny fraction of the amount owed when it appeared that foreclosure was imminent. This is especially true in a judicial foreclosure state where the second will receive absolutely nothing if there is a foreclosure.

In the past year it has become more common for the second lien holder to try to play hardball and agree to “lift the lien” for the closing on a short sale BUT not to release it.

That means that while it is no longer secured by the real estate it remains a collectable debt against the borrower. With such an agreement signed, the borrower has, in fact, re-obligated themselves to the debt. It is possible that such a document, acknowledging the validity of the debt, could be used to secure a judgment. With a valid judgment a lender can request a wage assignment (garnishment).

I always advise borrowers to seek legal advice when it comes to this sort of situation. An attorney might be able to negotiate for a lower amount on the unsecured debt, if, in fact, it is necessary to agree to that in order to avoid foreclosure. Foreclosure should be avoided at all costs.* Failure to use an attorney could cost you dearly down the road.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

WORD: Debt Consolidation and Debt Consolidation Loan

And the WORD for Today is:

Debt Consolidation—means refinancing multiple debts into a new loan. Unfortunately, consumers are frequently encouraged and agree to roll several short-term unsecured loans into a long term loan secured by their mortgage as a consolidation loan. This type of loan is seldom a good idea and frequently leads to default and possible foreclosure.

Debt Consolidation Loan—with this type of loan you pay off unsecured debt such as credit cards or department stores with a loan which is secured by collateral such as your home. Debt consolidation loans have been very popular during the past few years while interest rates on home mortgages have been really low. Unfortunately, many consumers did not realize the increased risk of default and possible foreclosure which they assumed when they made this loan. Without a large equity cushion the borrower would not be protected in the event of a decrease in property value. The unstable and declining home values in many parts of the country during 2007 has caused a substantial number of borrowers to become unable to meet the payments on these type of loans due to sliding interest rates coupled with loan-to-value rations too high.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased at www.DovePublishingHouse.com.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)