Short sales — the more palatable alternative to foreclosure — are increasing overall, but short sales involving homes with more than one outstanding mortgage still present a significant challenge to the mortgage servicing industry.
A short sale is the sale of a home for less than what is owed on any loan or loans securing the home and require approval from the lender or lenders who hold those loans because in essence those lenders are agreeing to take a loss. Successfully closing a short sale becomes much more difficult when approval is needed from two or more lenders, especially given that any lenders in junior position — meaning the loan they hold was originated after the first position loan — are not guaranteed any proceeds from the sale.
And because a short sale usually involves a homeowner in foreclosure, there is a limited amount of time to get all the approvals needed from lenders — while also lining up a buyer who is patient enough to wait for those approvals. Eventually the lender in the first position will probably foreclose if the process of approving the short sale is dragging on for too long.
Multiple-Lien Short Sales Fewer and Longer to Complete
So while pre-foreclosure short sales did increase 25 percent to a three-year high in the first quarter of 2012, short sales involving multiple loans only accounted for 4 percent of those total sales while the remaining 96 percent involved properties secured by only one loan. That 4 percent is disproportionately low compared to the 39 percent of properties in foreclosure that are secured by more than one loan, according to RealtyTrac data.
Given the above data, it’s not surprising that short sales involving multiple loans take longer to close on average than short sales involving a single loan. RealtyTrac data shows that pre-foreclosure short sales involving multiple loans sold an average of 448 days after the foreclosure started, compared to an average of 352 days on pre-foreclosure short sales involving just one loan (see graphic below).
Servicing Industry Welcomes Short Sale Guidelines
At a recent mortgage servicing industry conference in Dallas, Cody Trobaugh, Short Sale Director at Wingspan Portfolio Advisors and Brad Johnson, SVP, Portfolio Management, RoundPoint Mortgage Servicing Corporation, both pointed to the wide variance in practices and policies used by different lenders when it comes to short sales as one of the reasons it’s difficult to complete short sales — particularly those involving multiple loans, or liens.
John Rieger, Vice President of liquidations and short sales at JP Morgan Chase liens agreed with this assessment, but added that some recent government rules and regulations involving multiple-lien short sales are helping to take the wind out of the sails of second lienholders trying to drive a hard bargain.
Those guidelines, outlined in the revised Home Affordable Foreclosure Alternative (HAFA) program and recent national mortgage settlement and elsewhere, pinpoint the exact amount that can be given to junior lienholders in a short sale situation.
According to Rieger, these cut-and-dried guidelines have allowed second lienholders to transform from a “negotiating shop” into a “processing shop.”
That should mean an increase in multiple lien short sales going forward. An analysis of single-lien and multiple-lien short sales by the five lenders involved in the national mortgage settlement shows that multiple-lien short sales did increase on a year-over-year basis in the first quarter of 2012 for all five lenders, but with only 4 percent of the short sale pie these multiple-lien short sales have much room to grow.
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