Junior Liens

Junior Liens

Junior liens can pose a serious obstacle in any ShortSale. Depending on the exact particulars, 2nd’s can routinely stall the ShortSale, or make it fail altogether.  Clearly, the juniors are taking the biggest loss % on their loan, so negotiations can be very rough.  Despite their low position on Title, 2nd's realize that they still have a significant amount of power/sway, and their release is 100% required for the sale to go through. 

2^nd’s will typically release their lien (and/or satisfy the loan) for pennies on the dollar, but will fight tooth & nail for the best settlement possible.  Just like the 1^st mortgage, the 2^nd works for their investor, and it is their job to maximize the payment they receive.  Realizing that the 1^st mortgage holder is bound by their investor in terms of junior payoffs, most 2nd’s are flexible and creative with payment options.  They will try absolutely everything & anything to get more $$, including “requiring” the Real Estate Agents to pay out of their own pocket!

There are several different types of Junior liens that can show up on the Property’s Title, and each lien type acts/responds a little differently.  Naturally then, the negotiations & payoffs these Junior’s receive will differ & depend on several factors. By far, the most important factor to consider is who the investor is, and what their ShortSale rules are.

Secured Liens:  A “secured” lien is typically a mortgage lien (2^nd mortgage, HELOC, etc.).  It is customary for the 1^st Mortgage holder to allot a certain percentage of the 2nd’s  UPB (Unpaid Principle Balance) towards their discharge in a ShortSale.  As with everything else in a ShortSale situation, the actual payoff amount offered can/will vary.  For example, if the 2^nd has been discharged through Bankruptcy, the 1^st mortgage will not offer nearly as much as they would otherwise.  This is because the 2^nd is technically not owed anything on their note, and so the only value is the lien itself.  In most situations however, the 2^nd has not been discharged through Bankruptcy; in which case the 1^st will tend to offer 5-10% of the 2^nd’s UPB.  However, sometimes, the 2^nd will not agree to release for “peanuts,” and will require additional funds for their release.  It is the responsibility of the Real Estate Agents to figure out how to supply additional funds to the 2^nd, while still complying with the 1st’s Approval. Some 2nd’s will actually give 2 options for their ShortSale Approval: One is for the lien release only (lower payment), whereas the other option is for a full release (higher payment).  

Non-Secured Liens:  A non-secured lien originates from a non-mortgage.  This could be a lien from credit cards, auto loans, personal loans, attorney liens, collection companies, etc.  Whether the 1^st mortgage will allow any funds towards the discharge of these liens or not, will depend on the investor.  Some investors absolutely will not pay on any “non-secured” liens, and other investors will only allow funds for certain types of “non-secured” liens.   If the 1^st will not pay on “non-secured” liens, it is the responsibility of the RE Agent to figure out how to get them paid, or at least how to get the lien removed from Title.

Tax Liens: Tax liens are exactly that. Taxes. These can originate from personal income Taxes owed, Property Taxes owed, city code violations, etc.   Regardless of their specific nature though, Tax liens cannot be shorted and they must receive their full balance.  This is because Tax liens will always have 1^st priority on Title. In a ShortSale situation then, the 1^st mortgage holder will typically agree to pay these liens, since the liens will need to be paid regardless of the Property’s outcome, for Title to change hands.

HOA Liens: HOA liens are liens imposed by the Homeowner’s Association.  HOA’s are very powerful and difficult to negotiate.  There is no governing agency over the HOA’s, and no substantial rules/laws in place to govern their activities & decisions.  As such, HOA’s essentially have carte blanche to do & say whatever they see fit.  Another hurdle to overcome is recognizing that HOA boards are overwhelmingly composed of people who are not Real Estate saavy, and who may only meet once a month.   There are many factors which go into negotiating with an HOA, so the laws & strategies will vary from State to State. For a more in-depth discussion of HOA’s, check out our Blog from Jan. 4.

Before one can get started with the Juniors, and “go to the races,” it is important to keep in mind that most 2^nd’s will not even open a ShortSale file without knowing the 1^st Mortgage has already approved; so the 1^st Approval letter is usually required prior to beginning negotiations with the Juniors.

**Please be advised, neither Foreclosure Solutions, nor any agent employed by Foreclosure Solutions is an Attorney, CPA, or Tax Professional.  As such, we are not authorized to provide legal or financial advice.