Tips for Handling Subordinate Lienholders
A successful short sale transaction is almost always in the best interest of a homeowner versus a foreclosure. The real estate professional can play a huge role in assisting families to move on with fewer repercussions than a foreclosure.
Don’t be discouraged by subordinate lienholders. Do your homework. Know with whom you are working. Persistence is the key to success. Below are some tips to get you started:
Liability and Disclosures
To protect distressed homeowners from mortgage relief scams that have sprung up in recent years, the Federal Trade Commission (FTC) published the Mortgage Assistance Relief Services (MARS) final rule on Dec. 1, 2010. The MARS rule is primarily directed at companies that offer loan modification services to consumers for a fee not related to the commission for the sale of a home.
On July 15, 2011, the FTC announced that it will forbear from enforcing most provisions of its MARS Rule against real estate professionals who assist financially distressed consumers in obtaining short sales from their lenders or servicers when they are acting in their licensed capacity. The rule’s prohibition against misrepresentation continues to apply.
Can licensees negotiate with Subordinate Lienholders in seeking Short Sale Approval?
Yes! Some programs (i.e. HAFA) expect the licensee to be a major part of the workout. Whose job is it? In many cases it is the licensed professional that is best equipped to work proactively toward a negotiated agreement.
Discuss Outstanding Liens with Client
Make sure you identify all liens:
- Home equity lines of credit
- Homeowners/Condominium Association
- Property tax liens
- Mechanics liens
- Construction liens
It is also important to check with the client’s private mortgage insurance company that may request a borrower contribution before approving a short sale.
You can research the registered mortgage(s) on the property in the Mortgage Electronic Registration Systems (MERS). Also, look for recorded documents at the local clerk’s office. Many clerks have this information available online.
State law varies in how much recourse the lender has if the lender forecloses on a borrower’s property and the proceeds from the foreclosure sale are insufficient to cover the outstanding debt. Non-recourse states may protect borrower assets other than the property itself. Recourse states allow the lender to seek payment of any deficiency from the borrower’s other assets. State recourse laws will affect the amount a subordinate lienholder is likely to receive should a property go through foreclosure.
Necessary Documents and Contact Information
Lienholders often require different documents before deciding whether a borrower is eligible for a short sale. Generally, all will require:
- Affidavit permitting the lienholder to discuss the borrower’s account with the real estate broker or agent
- Hardship affidavit
- Income and bank account verification
- Documentation on other outstanding liens
Next, make sure all contact information is readily available. As the point of contact among all interested parties, real estate agents often are involved in negotiating payoff amounts with each lienholder.
Often, subordinate lienholders will seek additional compensation to agree to the short sale. Some helpful arguments when negotiating with subordinate lienholder include:
- If the lienholder believes that the offer is too low or the property’s value will recover, agents can provide comparables to show the fairness of the current offer and, where appropriate, the likelihood of a further decline in value if short sale is not accepted.
- Based on borrower hardship documentation, explain that the borrower will be unable to pay any deficiency and that requiring additional compensation from the borrower may push the borrower into bankruptcy.
- If the property is sold in foreclosure, the lienholder would receive no compensation (the typical situation).
Payoff amounts allowed by the first mortgage lienholder to subordinate lienholders vary considerably in each transaction. Before contacting the subordinate lienholders, it is imperative to understand who owns the first lien, who services it and in general what options they might be willing to provide payments to subordinate lienholders.
In HAFA transactions, borrowers must be fully released from liability for primary and subordinate liens. HAFA program guidelines allow servicers to determine and pay up to a total of $6000 in proceeds to satisfy subordinate liens secured by a mortgage on the subject property. The 6% limit no longer applies. The cap is not applicable to non-mortgage subordinate liens such as assessments owed to homeowner’s associations. Those liens may be covered out of sale proceeds if approved by the servicer.
Fannie Mae/Freddie Mac
REALTORS® report that Fannie Mae and Freddie Mac typically will allow up to 6% of the unpaid balance on subordinate liens to be paid out of the gross sale proceeds. Fannie and Freddie have not announced their policies.
Private Label and Portfolio Servicers
Many servicers state that they will allow up to 10% of the unpaid principal balance to be paid out of the gross sale proceeds to other lending institutions holding subordinate mortgage liens.
Some subordinate lienholders agree to a short payoff without conditions, while others demand that borrowers sign a promissory note for the unpaid balance. Often, the promissory note will be over an extended time period at a 0% interest rate. If a seller is asked to sign a promissory note, advise the seller to have an attorney review. It is important to work in close consultation with the attorney to verify all deficiency agreements are worked out prior to closing. In a state where the lenders are not allowed to seek recourse in connection with a foreclosure, it is hard to imagine a case where the borrower should sign a promissory note.
In HAFA transactions, lienholders who agree to a payoff from sale proceeds must also agree to release the borrower from all liability for the balance of the deficiency. Additionally, subordinate lienholders may not require contributions from the borrower or the real estate agent as a condition of releasing the lien.
Some lender employees reportedly have asked borrowers and real estate professionals to make a side payment that is not included in the HUD-1. In most cases, this is a RESPA violation and/or mortgage fraud and could result in civil and even criminal penalties.
Short Sale Education
Designed for real estate professionals at all experience levels, the National Association of REALTORS® (NAR) Short Sales and Foreclosure Resource certification, or SFR for short, gives you a framework for understanding the short sale process. As many agents can attest, your ability to close short sales and foreclosures depends in part on your confidence in seeing these transactions through.