As many who purchased homes in the past decade are familiar,
home equity lines of credit (HELOC), 80/20 loans and other similar secondary
mortgage products became very popular among current and aspiring Americans
homeowners.
For as great as they were at the time when it came to
renovating a home or avoiding a 20% down payment when purchasing a home, they
have handcuffed many people who are now underwater, facing a hardship and
trying to short sell their home.
Contrary to popular belief, you can do a short sale if your
home has more than one mortgage, but it’s not easy.
The Bloomberg article focuses on companies that are buying
second lien debt from mortgage companies – often for “pennies on the dollar” –
then pursuing the mortgagee for whatever they can get from them.
While it might not seem like a big deal for a second lien
(or a collection company) to pursue for money they’re contractually obligated
to, it’s not that simple either.
Many people applying for short sales are doing so due to
significant hardship – loss of job, illness, divorce, etc. Few people can cover the cost of the
outstanding balance, which is why they’re often doing a short sale in the first
place.
Companies servicing primary mortgages are typically willing
to approve a short sale and offer partial re-payment terms (if any) that are
in-line with the borrowers financial situation, as well as the significance of
their hardship, at a greatly reduced rate.
However, second liens are holding out for higher – often
unrealistic amounts – by comparison.
They might say that they’re offering to settle for “substantially less”
than what is owed, as Paul Colasono of the collection company Franklin
Management Corp. states in the article, but if it’s not in-line with the amount
the borrower actually has, the discount is irrelevant.
The example I often use is if someone were to offer you a
Ferrari for $125k, when it usually sells for $250k. It’s a great deal sure, but if you don’t have $125k, it
won’t do anything for you.
From our experience, it’s fairly common for second liens to
ask for more than what the buyer has.
Sure, there is some truth when Franklin CEO Tom Axon not-so-subtly
offers “At the end of the day, my friend, you signed a contract”, but as the
big banks have learned, holding people to contracts signed under very different
market conditions will often make them far less, than if they were to engage
their customer in reasonable negotiations.
Consider a family who took out an 80/20 loan on a house, in
order to put down less than 20%, but have now fallen victim to the
recession. Be it illness, divorce,
loss of employment or a combination, they can no longer afford the home. Typically, the first lien will accept
an offer within 5-10% of the current fair market value and might ask for a
contribution at closing from the borrower, which corresponds to their current
income level. The second, on the
other hand, often won’t take a penny less than 10% of what’s owed. Anything under 10% and they won’t
release their lien on the property, negating the sale.
Two problems immediately surface in many instances from this
tactic: 1) the borrower typically won’t have the funds to bring to the
table. In come cases they won’t
need to, because the first lien will usually allow a small amount of the proceeds
of the sale to be release to the second lien – often, between $1k-$3k – in the
form of a payoff. However, if the
payoff doesn’t cover what the second is seeking, then… 2) the first lien often won’t allow the
additional funds to be paid by the borrower, the buyer or anyone else at the
closing. So if the first approves
a maximum $3k to the second, but the second is demanding $10k, the deal dies.
To a point, you can understand where the first is coming
from. For starters, the first is
likely taking a much larger loss.
Further, they get to call the shots for a reason – they’re in first
position, so the second needs to be more flexible.
Usually, they are not, making their inflexibility a
gamble. Once the house goes to
foreclosure and the first lien gets what they can for the home, there is rarely
anything left over for the second.
With nothing left to secure the lien, the second has to go after the
individual, who often is insolvent and is either in, considering or has
completed a bankruptcy. A second
lien would be discharged under chapter 7 bankruptcy.
Of course, you can’t write an article about second liens
without bringing up one of the most notoriously difficult lenders to deal with,
USAA. As I’ve mentioned in past
blogs, USAA – who lends primarily to active and retired military, as well as
their families – expects full repayment from most of their borrowers, even
though many are forced to move and sell for a loss when transferred from base
to base.
“USAA is able to maintain an extremely high repayment
rate of deficiency balances after short sales due to the thorough manner in
which we evaluate a member’s complete financial condition and ability to repay”
- Dave Pacholczyk, a USAA
spokesman with Fleishman-Hillard Inc.
As I stated before, to specialize in military lending –
meaning you knew when you approved the primary or secondary mortgage that it
was highly likely a transfer would take place in the future – and to hold the
military clients (you boast in ads about servicing) hostage, is shameless. Many of the repayment plans offered handcuff
servicemen & woman, leading them to essentially make multiple house
payments - simply because they were transferred.
While we’re still in the relative early stages of learning
what the long-term effects of the housing crisis will be, I’m confident that
many currently on these re-payment plans will be forced to abandon them for the
same basic reason most people can’t make two mortgage payments for an extended
period of time – life happens and when money becomes tight, the “re-payment”
plan will be the non-essential financial commitment they’re likely to walk away
from first.
But USAA isn’t alone.
There are still plenty of second lien lenders/servicers holding
borrowers attempting short sales hostage by demanding unreasonable
amounts. Sadly, this will lead to
larger losses in the long run and continue to cripple the housing market.
As I noted above, the harsher the tactics, the more likely
people will qualify and file for chapter 7 bankruptcy, leaving the second liens
with nothing. Many first liens
have already learned the hard way that playing this game of chicken is a loser
and have begun accepting short sales at a higher rate than ever, which is
largely why the actual process remains slow – too many files to work through.
Make no mistake, they’re not accepting these short sales
because they care about their customers – they’re doing it because if makes far
more sense fiscally, than to allow the foreclosure process to take place.
Now, it’s time for second liens to come around. Until they do, let us navigate you
through this process – we’re happy to provide a free consultation and answer
any questions you may have…
You can read the full article here, at Bloomberg.com.
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