Why Are 2nd Position Lien Holders Not Discounting?
2nd Position Lien Holders unmotivated to discount their liens? In recent years, short sale investors would tell you the best type of short sale is one where there are multiple lien holders. If you are not in the first lien position and the property goes to auction, then there is a good chance that you would not receive any compensation for the lien. Therefore, even $500 was better than nothing. 2nd position liens were discounting 90% of their notes in order to acquire some capital rather than letting the home foreclose.
2nd Position Lien Holder Example
The property has a first lien worth $200,000 and a second position lien for $50,000. The market value has dropped and a new buyer has made an offer for $190,000. The first lien holder does its due diligence and determines that this is a fair price and accepts the offer. Typically, an investor would offer the 2nd position lien holder 10% of note value, or $5,000 in this example, for the note. This type of negotiation could make for an attractive purchase for an end buyer.
However, it is becoming more difficult to get second position lien holders to discount their notes. In fact, some of these 2nd position lien holders are actually willing to let the property go into foreclosure than take a discount. What has changed?
According to the Massachusetts Real Estate News, these 2nd position lien holders may have financial motivation not to discount their notes if one of the following scenarios occur:
- The 2nd lien holder has a loss sharing arrangement with the FDIC that will allow them to collect substantially more than the amount offered by the first lien holder under the short sale scenario.
- Unbeknown to the homeowner, the second lien holder has bought insurance against the default. The lender will now collect on that insurance. Depending on the terms, this may not have been possible if they agreed to a short sale.
- The homeowner’s loan with the lender was full recourse and they intend to pursue him for the deficiency and/or sell that right to a collection agency.
- There are tax advantages to the lender that far outweigh the offer of $5000 that they received from the 1st lien holder.
- Any or all of the above!
http://massrealestatenews.com/lenders-choosing-to-foreclose-instead-of-short-sale-approval/
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