Q: I have a second and third mortgage on my house. Can the lenders of my second and third mortgage foreclose on my house even if I make all my payments to my first mortgage lender in timely manner? Is there any way that I can short sell my house?
A: Your letter reminds us of the go-go years of real estate, where property values were rising so fast that many homeowners took out several home equity lines of credit – and home equity lenders happily agreed to sit behind the primary, secondary and even tertiary lender.
Sam once had a case where the owner of the property had ten lenders. The house had dropped in value, and the owner wanted out. Sam was able to negotiate an end to the stalemate – after a long period of time – and get the house sold. (We don’t recommend that any one property have ten lenders, by the way.)
In general, any lender can foreclose on your home. A second lender can foreclose on the house but would be subject to the loan made by the first lender. And the third lender could foreclose on the house but would be subject to the debt on the home held by the first and second lender.
Let’s say that your property was worth $500,000 at the peak of the housing market in 2005. Your first loan was for $350,000 and the second loan was for $100,000 and the third lender then gave you $50,000. The housing bubble burst and now your home is worth $250,000.
If you are current on your first loan but have stopped payments on the second and third loans, your second and third lender could sue you. But if the home is sold for $250,000 and the first lender is owed $350,000, the second and third lenders would get nothing because even though they would get title to the property, they would have to pay off the debt to the lenders in line ahead of them to be able to sell the home free and clear of other lenders’ rights.
In short, it’s not in their interests to force the sale. (Though that doesn’t mean they won’t try to apply pressure if they believe you have enough cash to pay them off.)
You can try to sell the home through a short sale. A short sale is a sale that results in less money than what you owe the lenders. So if you are able to sell the home for enough money to pay off the first lender but not enough to pay off the second and third lender, you’d have to negotiate to get the second and third lender to release their liens on the home to allow the sale.
You might be able to get a token amount of money for the third lender from the second or some other combination of funds to allow the sale to go forward, but the larger the number of lenders to negotiate the short sale, the harder it will be to get the short sale approved. (At the moment, there is some federal money available under a variety of programs through Making Home Affordable that pays the second and third lenders a token amount of cash if they allow a short sale or foreclosure to go through unencumbered.)
If you don’t get enough money to even pay off the first lender and you have three different lenders, you may find yourself negotiating for some time to get the lenders to go along with the short sale. Imagine the situation where the first lender is almost made whole from the short sale, but the second or third lender both refuse to let the sale go through unless they get something from the sale.
In this case, the second or third lender will hold up the sale unless the first lender agrees to give them something in exchange for letting the sale go through. For this reason, short sales can be rather complicated when the different lenders have varied goals in the short sale process. The second and third lenders know that if the first lender forecloses on the property, their loans will get wiped out and they will get nothing.
But if they hold out for a little now during the short sale, they might get something they might not otherwise get. Because of this possibility, some short sales fall through when the first lender refuses to give anything to subordinate (second or third position) lenders and the other lenders refuse to blink and let the deal go through.
Work with an attorney or real estate professional that has extensive experience with short sales and can assist you in navigating the murky waters of going through a short sale. There are plenty of minefields you need to avoid so that this doesn’t come back to haunt you years from now. If you don’t know an attorney who specializes in short sales or foreclosures, call your local bar association and ask for the head of the real estate committee and then request several referrals.