If you have done enough short sales deals involving multiple lenders, you will know that the most ideal short sale deal would be one with only one lien holder. When multiple lien holder approvals are required, negotiating a short sale approval can be tricky.
In transactions when there are multiple lien holders and the first mortgage lender forecloses, Junior lien holders understand that they will receive nothing. It’s a sad realty, but Junior lien holders will hold resilient to be bullied in this market. Companies are struggling to keep afloat and Junior lien holders are no different. They will do whatever they can to recover as much money as they can from a short sale.
The current trend is that Junior Lien holders would get paid $3000 by the Senior Lien holder regardless of how much debt is owed. But don’t expect Junior lien holders to lay down so easily. In fact, short sale deals have died because the Junior lien holder wanted more than $3000, even when the first and second lenders where the same company!
The other trend that is occurring is that Junior Lien holders are attempting to get borrowers to continue paying on a payment plan. Usually, these payment plans are made to allow the borrower to easily make payments based on their current financial status.
The usual response from the Junior lien holder is that they are asking for a promissory note from the borrower to release the lien from the property and give up their rights to deficiency. The thought is that they will get $3000 from the foreclosing lender, and even if the borrower makes a few payments from the promissory note, it is still more money in their pocket. The payment plan is very reasonable with a long payment term with a very low rate, which helps to ensure future payments and reduce the risk of default.
If Junior lien holders are getting the short end of the stick, why aren’t they foreclosing? The fact is many homes are foreclosed by the Senior Lien holder because between the payments for the first and second mortgages is almost always larger, it is harder for the homeowner to pay the 1st on time but attempts are always made to the 2nd mortgage. Therefore, late payments will occur on the first mortgage before the second mortgage which would cause the default to occur with the first mortgage.
Additionally, in the case where the Junior Lien holder forecloses, there would have to be enough equity in the home in order to pay off the Senior Lien holder, plus arrears, and any outstanding liens. With the decrease in home values, this doesn’t happen often.
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