Negotiating with second lien holders has long been a hot topic on the Short Sale Expeditor® website. Most recently, two agents asked the following questions about second lien holders and short sales.
Why do second lien holders play games when they are in the inferior position? Why doesn’t the threat of foreclosure scare the second lien holder?
First off, who knows why anyone does anything? But, nevertheless, I will be more than happy to speculate.
In a short sale where both the first lien holder and the second will each have to accept less than the amount owed, the first lien holder will state how much of the proceeds will be allocated to the second lien holder.
For example, let’s say that there is a first lien on Fred Flintstone’s property for $400,000, and a second lien on his property for $100,000. Let’s also say that Fred needs to move to another part of the United States because the quarry is relocating. His Bedrock home is only worth $300,000.
Fred’s property receives an offer for $300,000. His savvy short sale agent contacts his first lien holder and the lien holder says that they will allocate $6000 to the second lien holder.
The short sale agent calls the second lien holder and advises the lien holder that they will receive $6000 in order to release their lien at closing. However, the second says that they want $12,000.
This is the “game” that is referred to in the question above. Depending upon the state in which you reside and the deficiency laws for that state, the second lien holder may not be able to “go after” the borrower for the difference after closing. This could be one reason why the second lien holder plays this “game.”
Another reason may be that the second lien holder may have additional legal recourse in a foreclosure. So, if their “game” causes Fred’s home to be foreclosed, the second lien holder may have additional recourse (again, this depends upon the state in which you live, and you should discuss this with an attorney).
A third reason may have to do with mortgage insurance. If there is a mortgage insurance premium on the second lien, then the second lien holder may have more to gain in foreclosure than in a short sale.
Again, this is all pure speculation. Frankly, I just feel badly for Fred Flintstone that he cannot get his short sale approved. Shouldn’t the Slate Rock and Gravel Company have some sort of corporate relocation program?