Second Mortgage Standoffs Stand in way of Short Sales

8/8/2019 Second Mortgage Standoffs Stand in way of Short Sales

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Second-Mortgage Standoffs Stand in Way of Short Sales

By NICK TIMIRAOS

Source: Wall Street Journal, November 27, 2010

Sergio Trujillo thought he could avoid foreclosure when an investor made an all-cash offer last month tobuy his one-bedroom condominium in La Jolla, Calif., for less than the amount he owes on his mortgage.

But a standoff between Mr. Trujillo's lenders over a few thousand dollars threatens to derail the deal, known

as a short sale.

Like many heavily indebted borrowers, Mr. Trujillo has two mortgages: a first mortgage in the amount of$260,000, which is held by Freddie Mac; and a $50,000 second mortgage, handled by Specialized LoanServicing LLC. Freddie Mac will allow no more than $3,000 in sale proceeds to go toward the secondmortgage. But SLS says it will scotch any deal if it doesn't get at least $7,000.

"This is an all-parties-lose scenario," said Brian Flock, Mr. Trujillo's real-estate agent. "There is no housingrecovery when this happens."

Over the past year, real-estate agents, lenders and federal policy makers have pointed to short sales as one

way to revive moribund housing markets while helping troubled borrowersavoid foreclosure. But for homeowners that took out second mortgages duringthe boom, getting a short sale approved is proving to be a nightmare.

Most first mortgages, like Mr. Trujillo's, are guaranteed by government-controlled mortgage giants Fannie Mae and Freddie Mac or held by otherinvestors in mortgage securities. Second mortgages and other junior liens aretypically owned by banks and credit unions.

Banks are reluctant to write down second mortgages because many are stillcurrent, even if the borrowers owe more than the value of their homes. They

may also be able to pursue borrowers' assets after foreclosure.

"If I'm the second-lien holder, I may say, 'You know what, I want to see if I canhold out for a better deal,' " said Greg Hebner, president of MOS Group Inc., anIrvine, Calif., company that contacts troubled borrowers on behalf of lenders andservicers.
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Second Mortgage StandoffPage 2 of 2



The result is a "chicken game" between investors that leads to unnecessary foreclosures, said Jon Goodman,a real-estate lawyer and investor in Boulder, Colo.

As of June 30, 11 million homeowners owe more than their homes are worth and an additional 2.5 millionhave just 5% equity, according to real-estate research firm CoreLogic. To sell, those homeowners mustcover the shortfall or, more commonly, ask the bank to take a loss via a short sale. The short-sale processremains full of land mines. Loan servicers were never designed to handle large volumes of customizedworkouts and it can take months to bring loan servicers, investors and mortgage insurers to agree on a price.Softening home prices create greater potential for disputes over values. And lenders are wary of fraud.

Second mortgages, however, have become one of the biggest roadblocks. More than a third of about 1.33million properties in some stage of the foreclosure process have at least one junior lien, according topublicly available data tracked by CoreLogic.

Many seconds and home-equity lines are worth little in a foreclosure because home prices have fallen sosharply. That gives the second-lien holder "nothing-left-to-lose leverage," said Mr. Goodman. Banks saythey are approving deals where they can, but borrowers must agree to some form of debt repayment.

About three-quarters of the $1 trillion in seconds outstanding as of June 30 were held by commercial banks,and of those, more than $430 billion belong to the nation's four largest banksBank of America Corp.,Wells Fargo & Co., J.P. Morgan Chase & Co, and Citigroup Inc. Forcing write-downs on large numbers ofthose loans could significantly erode their capital.

Real-estate agents say some banks are getting better at cutting deals. Wells Fargo & Co. now dispatchesemployees in some markets to appraise homes even before a short-sale offer has been received to help speedpotential sales. Bank of America doubled its staff dedicated to handling short sales to around 2,700 over thepast year and began using an online platform to allow for paperless applications and approvals. The banksays it has approved 70,000 short sales through September, double the year-earlier total.

In Mr. Trujillo's case, SLS requested far more than the lien was worth on the secondary market, said MarkJohnson, who oversees short sales for Freddie Mac. "That's always been our challengeparticipation fromsecond-lien holders," he said. "It's ultimately their decision about whether they want to help us saveborrowers in foreclosure." Freddie says it hopes to negotiate a deal for Mr. Trujillo. SLS declined tocomment.

Jeff Gray waited months to complete the purchase of a home in Litchfield Park, Ariz., as part of a short sale,only to see it fall apart days before closing. Chase, which serviced the first mortgage for Freddie Mac,approved the sale but wouldn't forgive the second mortgage, which it owned. Chase says it has completed83,000 short sales since 2009.

Mr. Gray eventually bought another home in the same neighborhood; meanwhile, the short sale was listedfor sale by Freddie Mac earlier this month for $30,000 less than what Mr. Gray had offered.

"It's sad," he said. "The grapefruit tree in front is dead, the grass has turned brown, and the shutters arestarting to fall."

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Short Sales Still Hit Owners' Credit

By NICK TIMIRAOS

Source: Wall Street Journal, November 27, 2010

Q: Is a short sale as damaging to a borrower's credit as a foreclosure?

A: Generally speaking, yes. In both cases, a borrower's credit score can fall 100 points or more. A borrower

with an initial credit score of 780 could fall to around 620 as a result of a foreclosure or short sale, accordingto Fair Isaac Corp. A borrower with a 680 credit score could see a drop to 575.

Still, lenders are trying to give borrowers an incentive to complete a short sale and avoid foreclosure.Mortgage giants Fannie Mae and Freddie Mac allow borrowers who complete a short sale to becomeeligible for a new loan after two years. Borrowers who complete a foreclosure must wait as long as sevenyears.

Q: Why would a lender decide to allow a short sale?

A: Lenders generally lose less money on a short sale than on a foreclosure. Foreclosures are more costly

because banks must take back the homes and pay someone to maintain them and to resell them. On average,a short sale reduces the lender's loss by at least 20% and can happen in half the time as the averageforeclosure, according to a study by research firm TowerGroup Inc. Short sales may also fetch a better pricethan a foreclosure because occupied properties are generally better maintained. In Orlando, Fla., the averageprice per square foot on a short sale last month was $147, compared to $122 for a bank-owned property and$188 for a traditional sale, according to Collateral Analytics, a real-estate research firm.

Q: How prevalent are second mortgages?

A: There are around $1 trillion outstanding in home-equity borrowings, equal to nearly 10% of all the firstmortgages, according to Federal Reserve data.

Freddie Mac says that 14% of the mortgages that it guarantees have seconds behind them, but that numberonly includes seconds that were taken out when the first mortgage was originated.

Among mortgages that were bundled into securities that don't carry government backingmainly subprimeand other risky mortgagesslightly more than half have at least one junior-lien behind them, according to astudy by analysts at Amherst Securities Group LP.
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Q: What were seconds used for?

A: The analysis by Amherst Securities found that when the housing boom first began, the majority ofsecond liens were taken out after the first mortgage origination. Borrowers tapped into rising home equity asan alternative to credit cards to pay for home improvements or consumer debtsmedical, tuition or smallbusiness bills.

But by 2006, the majority of second liens had become so-called piggy-back mortgages taken along with thefirst mortgage to fund down payments and avoid paying mortgage insurance.

Q: Can anything be done to force first- and second-lien holders to cooperate?

A: In April, the government launched a voluntary program that provides incentive payments to servicers,investors and borrowers that agree on terms. Under the Home Affordable Foreclosure Alternatives program,holders of second-lien mortgages must accept 6% of the unpaid loan balance to a maximum of $6,000, andthey must relinquish all claims. The program has resulted in just 342 sales through September.

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Second Mortgage Standoffs Stand in way of Short Sales