Is A Second Mortgage Standing In The Way Of Your Short Sale?
Over the past year, short sales have been touted by some real estate experts as the solution to the lingering housing crisis. A true short sale, in which a mortgage lender agrees to release an underwater borrower from a portion of their debt so that a sale can go through, does have the potential to prevent foreclosure and transfer a sometimes neglected home to a smiling new owner. Neighborhoods and home values can improve as a result. The problem is that short sales require lender approval.
The process is difficult enough when only one mortgage is involved, but becomes a nightmare when both a first and second place mortgage lender must sign off.
According to the Wall Street Journal, more than a third of the roughly 1.33 million properties in some stage of foreclosure have at least one junior mortgage.
Could the plight of the borrower with two and three mortgages be partly attributable to the bureaucratic difficulty of dealing with so many banks and investors? To be sure, banks ill equipped to deal with borrower modification requests have aggravated the housing crisis. Things get worse, in the short sale context, when first and second mortgage lenders fight. Most first mortgages are guaranteed by government controlled Fannie Mae and Freddie Mac or held by investors in mortgage securities. By contrast, second mortgages are usually owned by banks. Once a short sale has been presented to both the first and second mortgage holder, their views on approval may be wildly divergent.
The Story Of Sergio Trujillo
A recent Wall Street Journal article, told the story of Sergio Trujillo, a homeowner in La Jolla, California. A standoff between Mr. Trujillo’s first and second mortgage lender is threatening to derail a short sale in which a cash buyer has offered to purchase his condo for less than the amount he owes on his mortgage. Mr. Trujillo has two mortgages: a $260,000 first mortgage held by Freddie Mac; and a $50,000 second mortgage held by Specialized Loan Servicing, LLC. According to the WSJ article, Freddie Mac will allow no more than $3,000 in sale proceeds to go towards the second mortgage. Specialized Loan Servicing is demanding at least $7,000 likely killing the deal. The example of Sergio Trujillo provides a painful reminder of the damage that a system ill equipped to handle the loans it has made can do to individual borrowers.
What have your experiences been attempting to get short sale approval on multiple mortgages?
See also: How Does Bankruptcy Affect a Short Sale?