As an Orlando short sale realtor, negotiating the payoff on a second mortgage is something I do on a day-to-day basis. I would say that at least half of the homeowners that visit our office have more than one mortgage. As a matter of fact, I’ve seen homeowners that have up to 3 mortgages on one piece of property. The good news is, however, that in a short sale situation 2nd and 3rd lien holders don’t have much leverage if the property is being foreclosed on by the first mortgage holder. In this type of situation, the 1st mortgage holder is always first in line as far as who gets paid first if the property goes to public auction. The only exception to this rule is if there’s an IRS lien in which case they would get paid first. After the 1st mortgage gets paid then the other lien holders get paid according to what order the liens or mortgages are attached.
A short sale is when a lender agrees to the sale of a property for less than what’s owed on the property because there isn’t enough equity to cover the full amount of the payoff. At this point, the second mortgage basically becomes an unsecured debt. If the sale of the property won’t even cover the 1st mortgage payoff, there’s no way that any other lien holders will get paid. When we are able to prove this to secondary lien holders, they are usually very eager to negotiate. They know that they don’t have a leg to stand on and if the property goes to foreclosure, or if the homeowner files for bankruptcy they won’t get a dime.
Once secondary mortgage holders realize there situation, it’s usually pretty easy get them to take a massive discount on what’s owed. Many times the 1st mortgage holder will only allow up to a certain amount to be paid the second mortgage holder or they won’t approve the deal. This is also a very powerful tool because when first mortgage holders have these guidelines in place, second mortgage holders have to either accept whatever the amount is or get nothing at all when the property goes to foreclosure. At this point, the burden of having to negotiate with secondary lien holders gets taken of the short sale realtor completely because the 1st mortgage holder will stick to their guidelines no matter what.
Many of my clients ask if we can negotiate their second mortgage balance with the loan being current. Unfortunately, in my experience of 8 years as an Orlando realtor, that has never been the case. The way they look at it is, if you’re still making the full payment why should they even entertain the idea of accepting less than the entire amount. I never, ever advise my clients to stop making their payment and I never will. However, I do educate homeowners on the way that things work and most of the time they decide to stop making that payment. unfortunately, this is usually the only way to get their attention.
Why should you settle at all? There are several reasons why you should settle with second mortgage holders as opposed to just not addressing it at all. For one thing, these deficiencies can come back to haunt you in the future and cause damage to your credit. Also, many times the original mortgage holder will turn collection efforts over to a collection agency that uses much more aggressive tactics to collect the balance. Also, in short sale situation, you have no choice but to settle with the second or the sale will not go through, it’s as simple as that.
