Short Sales Short Circuited By “Game of Chicken”
INDUSTRY NEWS, SHASTA COUNTY, SHORT SALES
December 13th, 2010
A recent article in THE WALL STREET JOURNAL highlighted a scenario I see in my day-to-day practice of real estate. A property seller, buyer and first lien holder all agree to accept a certain price only to have the second lien holder ask for more money. It’s noteworthy that the second lien holder would get wiped out and not recieve even a penny if the first lien holder forecloses, but nonetheless they demand thousands more than offered to sign off on the short sale deal.
The news article cites an example of a La Jolla condo owner with a cash offer from an investor. He was forced to try a short sale when the value of his condo sankwell below the amount owed to his lenders. He owed $260,000 to the first lien holder (now Freddie Mac) and $50,000 to the second lien holder, being handled by Specialized Loan Servicing, LLC. Freddie Mac has offered Specialized $3,000 to release their lien, an amount typical in the short sale transactions I’ve been involved with. SLS is holding out for $7,000.
The end result is a game of chicken, where the second lien holder tries to extract additional monies from the seller, buyer, first lien holder or real estate agents involved. Unfortunately, in many cases the game ends in a foreclosure, and the second-lien holder gets nothing.
Reasons cited by second lien holders for playing this game include:
- the mortgage payments are still current
- they wish to pursue the borrower for any deficiency but may relinquish that right by agreeing to a short payoff
- they believe they have nothing to lose since their loan is worthless anyways due to falling home prices
Here are some interesting stats quoted in the article:
- 11 million homeowners owe more than their homes are worth
- Another 2.5 million have 5% equity or less
- About 1/3 of the 1.33 million loans in some stage of foreclosure have second liens
- Second loans are typically owned by banks and credit unions
- Most first mortgages are held by Fannie Mae, Freddie Mac or investors in mortgage securities
- Loan servicers are overwhelmed trying to handle the short sale process
- Declining home prices create disputes over values used to approve short sales
- Lenders are wary of fraud, which the short sale process is subject to, by anxious homeowners
California law protects certain borrowers from being pursued by lenders who foreclosed or agree to a short sale. Purchase money loans for owner-occupied primary residences are usually exempt from lenders seeking deficiency debt repayment. However, California homeowners that refinanced or took out second loans usually lose all protections if they agree to a short sale. Lenders will release the lien so the property can be sold, but reserve the right to chase after the borrower for the loss they incurred.
530-224-6767 or 530-941-7492
BRAD GARBUTT
REALTOR/BROKER ASSOCIATE
REAL LIVING REAL ESTATE PROFESSIONALS
CORNER OF COURT AND PLACER IN REDDING
MORE THAN A QUARTER CENTURY LOCAL REAL ESTATE SALES EXPERIENCE
Brad,
It’s a pain, but I’m not sure I can blame the bankers. If you hold a second that’s a recourse loan, and the “owner” has any assets, what’s the incentive just to write it off?
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