Short Sale with Second Mortgage

5 Replies

I made an offer on a short sale property with a first mortgage by a large major bank, and a much smaller second mortgage through a local program to encourage homeowners to invest in their home. Both mortgages are in default.

The second mortgage reads, in part:
"In the event of sale or transfer of the Premises, the Borrower's obligation to repay Lender, as provided for in the Borrower's Promissory Note of even date herewith, shall be limited to the extent that funds are available for such purpose after satisfaction of the Prior Mortgage(s)."

The lawyer who will perform the closing, if it occurs, sent in the HUD-1. The bank then asked the agent for the payoff amount for the second mortgage to be included on a revised HUD-1, and both the agent and the lawyer copied me on a document showing the payoff amount.

Why is the second mortgage relevant? Is this just a ploy to get me to increase my offer?

And why would the agent / lawyer include me in this? It seems like an invasion of privacy for the seller/bank, and that the agent and lawyer are also trying to encourage a higher bid?

Because the second mortgage holder is a relevant party to the transaction and wants/is entitled to their money.  They have the right to decide whether or not to release their lien on this property.  It does not matter if they are a traditional lender or otherwise.

You already know you are attempting to buy a property through short sale because of two defaulted mortgages.  What privacy issues of the seller are your worried about?  

So what exactly does

"In the event of sale or transfer of the Premises, the Borrower's obligation to repay Lender, as provided for in the Borrower's Promissory Note of even date herewith, shall be limited to the extent that funds are available for such purpose after satisfaction of the Prior Mortgage(s)."

mean?

I interpret that to mean that, since Borrower's obligation is limited to excess funds, and there will be no excess funds, then Borrower's obligation is limited to zero, and the second mortgage is dead.

What am I missing?

I assume you are questioning this because your conclusion after reading the quoted text is: "nothing is owed to the second because there are no funds left over after paying the first". We don't know this is a correct interpretation, as we haven't seen the entire note and mtg. Shorted lenders are used to having to pay off junior liens, usually for 8-10% of their balance. The 1st mtg holder is looking for a "negotiated, reduced amount to the 2nd", not their full pay off on the HUD.

Your interpretation is pretty much accurate save one important detail.  Until they agree to release their lien for whatever amount they are willing to accept....be it $0.00 or $90,000....then there won't be a sale.  

If your sale price agreed to by the seller is enough to pay off the first mortgage, then all you have to do is appease the second lien holder.  If the house is over leveraged and the first is under water, you might get away with paying nothing to the second, although, why should they release their lien for nothing.  I am in this situation right now where the first is underwater.  They get the bulk of my money, but the second still gets about $8,000 to make them happy enough to release their lien.

If the first is not underwater, say they are owed $80,000 and your purchase price is $100,000....why wouldn't the second lien holder get the other $20,000?  The seller is not allowed to get anything.  That is the only party that is assured of nothing.  

If your purchase price you negotiated with the seller is just for the payoff amount of the first and leaves the second without anything....back to my earlier question....why should they release their lien?  In return for absolutely nothing, you want them to release their lien?  Good luck with that one.

Thanks Chris, Wayne,

Not sure what's owed on the first mortgage, but it was bought near the market peak and bank's appraised value is 63% of the seller's purchase price, and my offer is below that.  I'd guess that the first mortgage is underwater even without taking the second mortgage into consideration.

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