Do you have a 2nd mortgage or home equity loan (HELOC) on your Palm Beach County home?

When we are negotiating a short sale for one of our clients, and there is a 2nd mortgage or HELOC in addition to their primary mortgage, the negotiation can get complex and difficult. On many occasions the 2nd lienholder will want more money to settle than the 1st lienholder is willing to give up. This is where our hands-on experience becomes invaluable. If whomever is negotiating on your behalf (agent, attorney, paralegal, hourly employee) does not have the experience to know what options are present that will satisfy all parties, your short sale can fall apart at this point and your home get foreclosed on. To complete the negotiations with a successful outcome for our clients, we have utilized many different avenues to get past this type of roadblock.

(If you’re in a no equity position with your home and need to figure a way out, call me at 561.602.1258…Steve Jackson)

Below is an excerpt from an article where a 2nd lienholder was interviewed about this exact issue:

Tom Axon’s mortgage-collection firm gets about 25 calls a day from delinquent homeowners’ brokers seeking approval to sell their houses for a loss and avoid foreclosure. We’ll help, his staff tells them, as long as we get paid enough.

Axon, working with co-investors, buys distressed U.S. home-equity loans and other junior real estate liens, often for pennies on the dollar. Investors like Axon have to be dealt with whenever a home is sold in a short sale, a transaction in which the lenders agree to accept less than what’s owed on the property.

“The short-sale brokers know us -- they know we’re not cupcakes,” Axon, 60, chairman of Jersey City, New Jersey-based mortgage-servicer Franklin Credit Management Corp., said in an interview. “At the end of the day, my friend, you signed a contract. You owe money and we’re willing to reach an accommodation that is commensurate with your ability to pay.”

Tough bargaining by second-lien holders is delaying deals and killing some short sales, even as banks embrace the practice to avoid costly foreclosures and help clear the market of homes that are worth less than the loans on them, said Vicki Been, a New York University law professor who has studied mortgages.

“It’s an opportunity for the second-lien holder to charge a price for their cooperation, because it’s needed for a short sale,” Been, a director at NYU’s Furman Center for Real Estate& Urban Policy, said in a telephone interview. “If they’re too greedy, it may squelch the whole deal.”

Second Mortgages

Roadblocks involving second liens are standing in the way of more short sales, which reached the highest number in three years in the first quarter -- 133,192 total transactions -- said Daren Blomquist, vice president at RealtyTrac Inc., a real estate information service in Irvine, California.

While about 39 percent of homes that have entered the foreclosure process have more than one lien, just 4.2 percent of short sales -- 5,658 transactions -- completed in the first quarter were on homes with second mortgages, according to an analysis RealtyTrac performed for Bloomberg. (This is why it is so important to have experience like ours on your side)

“It appears that short sales with multiple liens aren’t happening as frequently and are taking longer to complete,”Blomquist said in a telephone interview. Short sales that fail tend to end up as foreclosures instead, he said.

Second-lien holders are protecting their interests,“which, unfortunately, don’t dovetail with everybody else’s interest,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.

“Subordinate liens have become the biggest hurdle to resolving the foreclosure crisis more quickly,” he said.

Homes with second mortgages were twice as likely to be underwater, according to a July 12 report by real estate information provider CoreLogic Inc. (CLGX) (CLGX) That makes them candidates for short sales, even if they don’t have delinquent loans, because their mortgage debt is greater than their resale value. The average negative equity for homes with second liens was $82,000, compared with $47,000 for single-mortgage homes, Santa Ana, California-based CoreLogic said.

‘Hostage Situations’

“It’s very much like hostage situations,” Sam Khater, CoreLogic’s senior economist, said of second-lien holders.“It’s like an all-or-nothing situation in terms of payoff, and they’re very unwilling to bargain.”

Banks, facing an onslaught of pending foreclosures, are turning to short sales because their losses are about 15 percent lower than on repossessions, which can take years to complete while taxes along with legal, maintenance and other costs accumulate, according to Moody’s Investors Service in New York.

Holders of first mortgages are pre-approving short sales, streamlining the closing process, forgoing their right to pursue unpaid debt and giving some borrowers cash incentives of as much as $35,000 for relocation expenses.

U.S. government programs have prodded banks to speed up short sales because they’re less damaging to credit scores and property values than repossessions are. The Home Affordable Foreclosure Alternatives program, known as HAFA, pays servicers as much as $2,200 and homeowners as much as $3,000 for completing short sales. The program was changed in March to increase payments for second-lien holders who agree to release borrower liability, lifting the maximum settlement to $8,500 from $6,000.

60 Days

For loans guaranteed by Fannie Mae (FNMA) (FNMA) and Freddie Mac (FMCC) (FMCC), the government-run mortgage companies, servicers now must communicate final decisions on approvals within 60 days of a buyer’s short-sale request. Fannie Mae tries to put a limit on negotiations by capping the amount junior-mortgage owners can receive at $6,000 or 6 percent of the unpaid balance, whichever is less. The company’s guidelines don’t allow any party to the transaction, including the buyer, seller or real estate agent, to kick additional money to the junior-lien holder.

“We want to help more borrowers avoid foreclosure through alternatives such as short sales, and we hope that second-lien holders will do their part,” Andrew Wilson, a spokesman for Washington-based Fannie Mae, said in an e-mail.

The right to collect on unpaid junior liens varies with state laws and type of loan. In 39 states, including Florida and New York, lenders may seek deficiency judgments, giving them recourse to pursue borrowers for unpaid mortgage balances.

“PNC pursues deficiency judgments unless otherwise negotiated in the short-sale agreement,” Fred Solomon, a spokesman for the Pittsburgh-based lender, said in an e-mail.

While PNC doesn’t comment on specific loans, it’s common for first and second liens serviced by the same bank to be controlled by different investors who have different negotiating positions, said Solomon, whose bank had $28.4 billion in second liens as of June 30.

“You may find cases in which a bank is servicing a first mortgage loan on behalf of an investor, and the same bank holds a second lien on the mortgaged property,” he said in the e-mail. “The mortgage-servicing team of the bank operates at the direction of the investor, according to rules established by the investor, in negotiating with another part of the bank.”

Largest Banks

The four largest U.S. banks -- Bank of America (BAC) Corp., Wells Fargo & Co. (WFC) (WFC), JPMorgan and Citigroup Inc. (C) (C) -- held 48 percent of the $849.5 billion in second liens as of March 31, according to the newsletter Inside Mortgage Finance. Home equity lines of credit accounted for $590 billion, or 69 percent of the value of second liens, as of that date, according to Amherst Securities Group LP.

Risks associated with home-equity loans “may escalate” as borrowers face rising obligations to pay down principal on lines of credit, according to a July 5 report by the Office of the Comptroller of the Currency. Borrowers, who were allowed to make nominal or interest-only payments on the credit lines for as long as 10 years, will be obligated to pay down $15 billion in principal in 2013, $29 billion in 2014 and $53 billion in 2015, according to the report. (This is a huge issue you have not heard anyone

Some of the (2nd liens) are being sold to buyers such as Axon, whose company services about 40,000 loans, most of which are owned by joint ventures that he has an interest in. The handful of companies that dominate the secondary market for nonperforming second liens are trying to persuade large banks to sell their portfolios of subordinate debt, said Lou DiPalma, managing partner at Garnet Capital Advisors LLC, a loan-sale consulting firm based in Harrison, New York.

Collecting on delinquent subordinate debt is expensive and complicated, especially when the borrower no longer lives in the house. Servicers for such loans make 80 percent of their money from 20 percent of loans, DiPalma said.

Nonperforming junior liens sell for between a quarter of a penny and 60 cents on the dollar of the outstanding balance, he said. The most valuable junior liens are delinquent loans on properties where the owner is not underwater, he said. Loans that are the cheapest and hardest to collect on involve foreclosed properties where the homeowner has already been evicted.

The key to success is knowing something about the borrower, according to Axon. Franklin’s Face to Face Home Solutions division dispatches retired police officers and firefighters to speak with delinquent borrowers and write reports that describe the condition of their properties and their attitudes about paying. A BMW parked in the driveway may be a clue to a homeowner’s finances, Axon said.

The company also compiles a profile of the borrower using public databases, credit scores, original loan applications and, sometimes, Facebook and Twitter pages, and ranks borrowers based on their ability to pay, Axon said.

“We are making our decisions based on characteristics of the borrower,” he said. Homeowners are “the ones being stubborn. They’re the ones who got their money and bought their boat, and now they want their boat for free. The fact is we’re willing to discount the obligation, get this behind them, and have them fulfill their obligations. If everybody gave everybody what they got for free, we wouldn’t have a banking system.”

To contact the reporters on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net; Prashant Gopal in New York at pgopal2@bloomberg.net

To contact the editors responsible for this story: Kara Wetzel at kwetzel@bloomberg.net; Rob Urban at robprag@bloomberg.net.