Negotioating second lien on a shortsale

16 Replies

Thanks ahead of time for any pointers or advice. 

I am in contract on a short sale. Junior lien came up in title report. Ditech is 2nd lien holder. SPS is senior. Seller has already qualified for short sale with SPS. Now 2nd lien holder is requiring her to qualify for short sale as well. 

How likely is it that the second lien holder (ditech) will require some payment on amount owed in order to approve the sale. If they do ask for reimbursement, will they negotiate with senior lien holder? Considering all funds are going to senior holder, it seems logical that the two banks would negotiate in order to complete approval process.

Is that how things go? Or will I (the buyer) have to be the middle man negotiating between both lenders? Any help would be appreciated.

Short sales with seconds are always difficult unless the first can be paid in full and only the second is short. If the first is short then the second has nothing to gain by approving the short sale. Any proceeds that go to the second have to be approved by the first, this keeps the seller or buyer from sending them money directly to get approval. The first essentially says if there is money for the second then it is should go to the first instead. 

There is a chance of making it work. You have to get the first to work directly with the second to negotiate a deal. If the first is planning on foreclosing without the short sale then the second probably wouldn't get anything from that scenario either, so they may accept a small amount to approve. I have seen them agree to a few hundred dollars when owed much much more. 

The seller should keep in mind that just because the short sale is approved doesn't mean the debt is forgiven. The lien holders can still go after a deficiency judgement. Or if they do forgive the debt, the seller will have to claim it as income for tax purposes. I always suggest speaking with an attorney and cpa about short sales. 

Hope this helps some! Thanks Aaron

1st lien will allot money to 2nd lien. Depending on how much is offered, 2nd liens position and guidelines, will determine if they will accept it or counter. If the 2nd lien is short it needs to be ran through the short sale process too. 

Yes, short sale “approval”from the first, which does not include an acceptable amount to the second, is useless......at this point only she only “qualifies” which she must also do with the second.  That’s the easy part, now you have to get the lenders to agree on the proposed Net them from the sale.  The buyer should realize the first may not approve enough to the second to make them happy, so the buyer should plan on kicking in some extra money.  The banks don’t negotiate directly with each other.  Lenders will generally require the property be listed for a 5 day minimum or so.

I see. Something i forgot to mention is that the senior loan is in process of foreclosure.  They have been putting off auction date in order for me to close the deal. Considering if it is foreclosed by 1st then 2nd lien holder will get nothing (as far as i understand) why would 2nd be requiring any payment through shortsale? 

@Sean Dougherty Who is handling the negotiation of the short sale? This should be handled by an attorney or title company that understands the situation. When you submit a short sale package, you would have submitted an estimated settlement statement that broke down the closing costs, fees, and payoffs to the lenders. During that process the 1st lien holder is made aware of a 2nd lien holder and they include the minimum payoff to the 2nd. They do this to ensure the 2nd mortgage has an incentive to cooperate. Often the 2nd makes you jump through hoops and will attempt to get more money, including asking the client to wire money before the closing, but they almost always end up taking the offer from the 1st.

If you have a 1st lien holder offering nothing to the 2nd lien holder, I have to believe something was done wrong.

@Bob Floss II . Myself and my realtor are handling negotiation of short sale.  It's been a long road on this one. Too many turns to list here. Bottom line is after 6 months in escrow we finally were able to locate the second lien holder. Title company First American says they have no involvement in negotiations between 1st and 2nd lien holders. 

We already have submitted short sale package to senior lien holder along with hud1. We are in process now of submitting same package to 2nd lien holder. From what both banks have told us, they will not directly negotiate with each other. 

I spoke with 2nd lien holder via phone and they informed me they will require some payment to approve short sale. My main question is, considering first loan is close to foreclosure, why would the 2nd lien holder expect any funds from this short sale? If it were to foreclose they would get $0. So is it likely that 2nd lien holder will approve short sale with very minimum payoff so they could get at least something? 

Ask the first lien what the maximum they allow to a suboridnate mtg lien and present that to the 2nd. 

Depending on how much debt is owed on the first  and what the home sells for at auction, money may be left over for the subordinate lien holder. If the 2nd is compeltely upside down and someone wants to complete a sale then it's in their financial interest to try to recoup any funds that they can.


Depending on 1st lien investor or insurer guidelines will determine how much money is allotted to suboridnate lien holders.

Originally posted by @Sean Dougherty :

@Bob Floss II . Myself and my realtor are handling negotiation of short sale.  It's been a long road on this one. Too many turns to list here. Bottom line is after 6 months in escrow we finally were able to locate the second lien holder. Title company First American says they have no involvement in negotiations between 1st and 2nd lien holders. 

We already have submitted short sale package to senior lien holder along with hud1. We are in process now of submitting same package to 2nd lien holder. From what both banks have told us, they will not directly negotiate with each other. 

I spoke with 2nd lien holder via phone and they informed me they will require some payment to approve short sale. My main question is, considering first loan is close to foreclosure, why would the 2nd lien holder expect any funds from this short sale? If it were to foreclose they would get $0. So is it likely that 2nd lien holder will approve short sale with very minimum payoff so they could get at least something? 

Easy answer for why. If the first forecloses, then the junior is a sold out lienholder and may pursue the borrower in court for the entire amount. That assumes the borrower did not discharge the debt in bankruptcy. So, why would I stall getting something that is better than nothing? Sometimes, getting nothing is better when I can spend a few hundred bucks to file an action in court and sue the borrower. Often times, I get a lot more in a lawsuit negotiation than I would be offered in a short sale.

@Johnny Kang That simply refers to an automatic trigger of the 1099 at 36 months of no payments.....doesn’t change anything about a lender being required to issue a 1099 when they Actually forgive a debt.  As @Ron S. , who occasionally seems to be correct about lender issues :), said....this is a requirement for them, it’s not something you “get” them to do, and it doesn’t help them, or you in a short sale negotiation.

@Sean Dougherty The agent, if they had any short sale experience at all, would have known to determine if there was a second mtg upfront, submit short sale packages to both, and structured the offer and prelim hud, with 5% or so to the second, accordingly.......you’re now playing catch up with a so far botched short sale attempt.

@Wayne Brooks, the second lien was owned by Beneficial Financial, who closed down all their operations in 2016. It took months to locate where the loan was transfered to, as we couldnt speak to anyone from Beneficial. That is why we are playing catch up. Borrower has not recived a bill on this loan for over a decade. She had forgot it even existed or thought it was released. It came up during title report at opening of escrow (back in November 2017) and we have just now located it. Ditech now holds the lien. 

Sps portfolio servicing is senior lien holder. They have approved the shortsale months ago and even approved the price. Crazy that they approved price without confirming or communication with junior lien holder. 

In any case,  that is why I am pushing for this one. I have an approved shortsale at a great price, just need to work with 2nd lien holder to get approval from them and we should be out of the woods. Consodering 1st mrtg holder will foreclose immediately if this shortsale doesnt go through, (they are postponing auction date so this deal can have a chance to go through) hopefully 2nd mrtg Ditech wont ask for too much and Senior lien holder will be willing to provide those funds without adjusting our approved purchase price. 

Anymore advice is appreciated now that my whole story has been told.

@Sean Dougherty The second mortgage is going to require some payment, they are not going to release for nothing. Did you put the payoff to the first and second mortgage on the prelim HUD and provide a payoff for the second mortgage to SPS? When they saw there was a second, SPS should have included a minimum payoff in their approval letter. SPS has been doing this for a long time and they wouldn't have put zero for the second mortgage if they knew they needed approval. It sounds to me like SPS thinks they are the only loan on title. In order to get the SPS approval modified, it will have to go back into review. The current approval letter is worthless as far as being able to close. The client will have to sign a document at closing that no funds have been paid out that are not reflected on the HUD. The first mortgage will not approve the HUD if you show a payment to the second mortgage they did not approve. The second will not give you an approval letter taking zero.

The best thing I can tell you is re-submit the file correctly with a payoff to the second mortgage and request SPS accelerate the review.

It is not SPS who would track down and negotiate with the junior directly. That is your job. As soon as you knew there was a junior a payoff amount should have gone on the HUD, to be approved by SPS from day one. If you have not already done this, do it now and resubmit to SPS. If they still net out, they may approve it without wanting a higher price. Only one way to find out.