Second-Lien Holders Are Killing Short Sales

WASHINGTON – July 27, 2012 – Second-lien holders are being blamed for derailing many short sale transactions. But a bill working its way through Congress – the Fast Help for Homeowners Act – would, if approved, require second mortgage lenders on federal mortgages to report their final decision on a short sale agreement within 45 days. If the second-lien holder doesn’t do that, the deal would automatically be approved on the 46th day. U.S. Rep. Jerry McNerney, D-Calif., proposed the legislation.

Greg Galli, a broker with Suburban Realty in Palmdale, Calif., supports the bill after seeing some of his recent short sale transactions fall through because second-lien holders refused to negotiate. He recalled one incident in which the second-lien holder refused a $6,000 payment from the first-lien holder in order for a short sale to move forward. Instead, the second-lien holder demanded $1,400 more, amounting to a total of $7,400, and all from the homeowner.

“(Second lien-holders) can really delay the deal if they don’t want to respond, or if they just don’t want to do anything,” Galli told HousingWire. “It doesn’t make sense. If they let it go to foreclosure, the second lien is going to lose out completely. It would make sense for us to work through the process, and then they can negotiate.”

Some in the housing industry aren’t in favor of legislation that might push a second-lien holder to make a faster decision on a short sale. Critics argue that first-lien holders need to be more willing to work with second-lien holders on an agreement that favors both parties.

“I am always hesitant to force second-lien holders or any lender to do something that they didn’t contractually agree to upfront, because ultimately that will add to the cost of future credit and reduce its availability,” Mark Zandi, Moody’s Analytic’s chief economist said.

Source: “Evasive Second-Lien Holders Thwarting Short Sales,” HousingWire (July 25, 2012)

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