What happens to Second Mortgages in a short sale?

Second mortgage loans seem very different from 4-5 years ago.  A second mortgage is a loan on a piece of real estate when there is already a loan in place.  They were widely used to get 100% financing on homes.  Second mortgage rates were typically higher than first mortgages due to the higher risk.  Second mortgages are all but extinct in today’s home purchases.  In the world of short sales and foreclosures, they are the supporting actors.

Any chance anyone has at avoiding foreclosure is often doused when there is a second mortgage loan.  You can work all day long on getting the first mortgage to take less than owed and even if they approve, the second mortgage may not.  The second mortgage will usually settle for fractions less than you owe, but it is usually more than anyone wants to pay them.

So what happens to second mortgage loans in a short sale?  You guessed it.  They need to agree to a short sale also.  Although second mortgage rates are typically higher, the amount owed is usually less.  Here is how it works.  You send the offer and any other required paperwork to the bank who holds the second mortgage.  They review all documentation and come back with an amount they need.  Most of the time, they come back with a number which is too high.  The key to negotiating with second mortgages, is to push as hard as possible and get them to take the smallest amount possible.  A very typical number is between $3000 and $5000 dollars (although every situation is different).  Many second mortgage holders will accept something in this range.  So after 30-60 days of negotiation, you finally get them to agree to accept the short sale.  Phew, glad that is over.  So who in the world is going to pay them this money?

Most of the time, the first mortgage will pay them some money as part of their short sale approval.   Bank of America will typically pay $3000 to the second mortgage and IndyMac (now One West Bank) pays $2,000, to give you two examples.  Simple math tells you that $3000 is less than $5000 and there is still $2000 left.  So now you are down the road 90 days, you have short sale approval from the first mortgage, short sale approval from the second mortgage, and guess what?  You can’t close because no one is willing to pay the extra money to get the second to go away.

Lately, big banks are under scrutiny for trying to get money from Realtors, buyers, etc., to get the amount they want.  The good news is that people are finally paying attention to the poor practices of big banks.  The bad news is that your home still won’t sell and you end up as another tally on the long list of foreclosure victims.