How to Deal With Junior Lien Holders
Today's question is, how to deal with a junior lien within the context of a short sale transaction.
We're going be discussing all the things you need to know if you've got a second mortgage on your house.
1. Negotiate All of the Liens Simultaneously.
If you have a second mortgage, or a junior lien, or a home equity line of credit on your house, you want to make sure that your negotiator is negotiating all of those liens at the same time, is settling all those debts simultaneously. One of the worst things that could happen to you in a short sale is if you've got approval on a first loan, but the second hasn't even started negotiations, well, gosh. By the time you get approval on the second loan, that first approval letter could expire bringing a screeching halt to the entire transaction.
2. Various Settlement Outcomes.
If you've got a second mortgage attached to the house, you want to make sure that that second mortgage settles in full and final satisfaction. That's sort of your pie in the sky ideal outcome, what I refer to as a global or a universal settlement. What that entails is the second mortgage not only releases it's lien from title allowing the house to move to closing so you can close on the short sale transaction but also forgives any remaining balance left, after the proceeds are applied to that second. That's your global settlement. That's your settlement in full and final satisfaction. That's option number one.
Another possible outcome is called a lien release only. That's what you don't want. Lien release only, meaning the lienholder simply removes it's lien from title, right, allowing the house to close, allowing the transaction to close. However, it retains the right to pursue the borrower for any deficiency balance left on that second. Not an ideal outcome for the borrower.
3. Settlement Plus Contribution.
That's where the lien-holder agrees to release its lien from title. And for an additional amount or an additional contribution, they will settle in full and final satisfaction and waive any remaining balance. Moving on to our next point, the settlement amount. How much do these junior lienholders usually settle for within the context of a short sale transaction? Well typically, it's anywhere between $6,000 to $8,500, which often times is a fairly nominal sum when you're looking at the total mortgage debt associated with these seconds. But as we previously discussed, sometimes that $6,000 or that $8,500 contribution authorized by the first to go to the second isn't sufficient to satisfy the entire underlying balance. And therefore, these seconds require an additional contribution from the parties to settle in full and final satisfaction.
4. How Does the Second Get Paid Within the Context of the Short Sale?
Well, the second gets paid out of the net proceeds or a percentage of the net proceeds authorized by the first. Okay, so the first is in the driver's seat. The first will authorize a contribution to go to the second so that the second releases it's lien from title and the parties can move to closing.
Remember, you can't sell a property that has a lien on title. It does not have what we call marketable title. It's not sellable. So that second, in order to release it's lien, in order to release it's stranglehold on the transaction, they must release their lien from title and they need something in exchange for doing so. And usually it's a nominal sum authorized by the first to go to the second.
As we previously discussed, that authorized contribution from the first to the second is usually sufficient to get the second to not only release it's lien from title, but also settle in full and final satisfaction, meaning that the borrower is no longer on the hook for any remaining balance.
5. What to do about stubborn seconds?
What if my second lien-holder just flat out refuses to release it's lien from title, or refuses to settle and simply won't let the transaction close? Well, that's why I call them the pesky seconds, right? Because they can really hold a deal hostage and really kill a short sale transaction by digging their heels in. In that case, you may be best served by exploring Chapter 7 bankruptcy as an option to discharge any debt on those junior liens.
And that's my take on how to deal with junior liens within the context of a short sale transaction.