The short sale has always been a tricky transaction. It’s a challenge to obtain the required paperwork from the seller. It’s a challenge to find a qualified buyer who is willing to stick around until the short sale gets approved. It’s a challenge to prepare the paperwork and to get it accepted by the mortgage lender. The challenge becomes even greater when there is more than one lien holder (more than one mortgage lender) for the property being sold in the short sale transaction.
Traditionally, the first lien holder (the lender who holds the first mortgage) offers the junior lien holder(s) a small amount of money in order to release their lien. They do this because all of the liens on the property must be reconveyed at closing in order for the sale to occur. Junior lien holders will usually accept what is offered by the first lien holder.
You may wonder why a junior lien holder would accept, say $3000, when the loan balance is $100,000. The reason is quite simple: if the property is foreclosed upon by the first lien holder, the second lien will be wiped out and the lien holder will not receive any money.
When I started working short sales, junior lien holders would take anything offered to them by the first lien holder: $500, $1000 . . . anything at all.
Increasingly they have gotten more difficult to deal with. CNBC reports on some of the new, creative, and unscrupulous tactics that some junior lien holders are allegedly using in order to obtain a little more money to release their liens.