Junior Liens Get in the Way of Short Sales

by 24 Jul 2012

(TheNicheReport) -- Now that several major banks and mortgage lenders in the United States have become more receptive to the idea of short sales in order to keep their Real Estate Owned (REO) portfolios from expanding, many prospective sellers are facing obstacles in the form of junior liens. These encumbrances to clear title are part of the aftermath of the housing and credit bonanza that swept through American neighborhoods in the early 21st century. At one point, junior liens were mostly second mortgages taken on by borrowers who trusted in the ever-increasing value of their properties, but they later multiplied into mechanic's liens and unpaid debt judgments.

According to RealtyTrac, a California-based real estate analytic firm, more than 130,000 short sales are currently held up by pesky junior liens. In some cases, mortgage lenders will approve short sales as long as they can be completed within a certain time frame, but clearing some of these second mortgages and other liens can often be difficult and may end up delaying or even killing the deal.

Homeowners who took out home equity lines of credit, second mortgages or other types of subordinate financing are more likely to have ended up in foreclosure proceedings after the bursting of the housing bubble. Homes encumbered with junior liens are also more likely to be underwater. In some cases, banks who hold the senior lien on title are offering some level of legal assistance to negotiate with subordinate lien holders and push short sales through. The motivation is certainly there: Under the Home Affordable Foreclosures Program, junior lien holders can get up to $8,500 from the government when they agree to cede their interest on title and allow a short sale to take place.

The two government-sponsored mortgage investment companies, Fannie Mae and Freddie Mac, will provide up to six percent of the balance owed to junior lien holders who will collaborate in the short sale transactions -as long as the percentage is lower than $6,000. In Florida and 38 other states, where the laws allow lenders to pursue collection of junior liens even after foreclosure, the delay in short sales is even more noticeable. Not surprisingly, widespread marketing of piggyback loans took place in these states during the housing frenzy of the early 2000's.


Should CFPB have more supervision over credit agencies?