Tom Axons mortgage-collection firm gets about 25 calls a day from delinquent homeowners brokers seeking approval to sell their houses for a loss and avoid foreclosure. Well help, his staff tells them, as long as we get paid enough.
Axon, working with co-investors, buys distressed home-equity loans and other junior real estate liens, often for pennies on the dollar. Investors such as Axon must be dealt with whenever a home is sold in a short sale, a transaction in which the lenders agree to accept less than whats owed on the property.
The short-sale brokers know us – they know were not cupcakes, said Axon, 60, chairman of Jersey City, N.J.-based mortgage-servicer Franklin Credit Management. At the end of the day, my friend, you signed a contract. You owe money, and were willing to reach an accommodation that is commensurate with your ability to pay.
Tough bargaining by second-lien holders is delaying deals and killing some short sales, even as banks embrace the practice to avoid costly foreclosures and help clear the market of homes that are worth less than the loans on them, said Vicki Been, a New York University law professor who has studied mortgages.
Its an opportunity for the second-lien holder to charge a price for their cooperation, because its needed for a short sale, said Been, a director at NYUs Furman Center for Real Estate & Urban Policy. If theyre too greedy, it may squelch the whole deal.
Roadblocks involving second liens are standing in the way of more short sales, which reached the highest number in three years in the first quarter – 133,192 total transactions – said Daren Blomquist, vice president at RealtyTrac., a real estate information service in Irvine, Calif.
While about 39 percent of homes that have entered the foreclosure process have more than one lien, just 4.2 percent of short sales – 5,658 transactions – completed in the first quarter were on homes with second mortgages, according to an analysis by RealtyTrac.
It appears that short sales with multiple liens arent happening as frequently and are taking longer to complete, Blomquist said. Failed short sales tend to end up as foreclosures, he said.
In June, short sales of homes with multiple loans were completed an average of 19.75 months after the borrowers last payment, according to an analysis by J.P. Morgan Securities, a unit of JPMorgan Chase & Co. Thats about two months, or 12 percent, longer than short sales of homes with single mortgages.
Second-lien holders are protecting their interests, which, unfortunately, dont dovetail with everybody elses interest, said Mark Zandi, economist at Moodys Analytics Inc. in West Chester, Pa. Subordinate liens have become the biggest hurdle to resolving the foreclosure crisis more quickly.
Homes with second mortgages were twice as likely to be underwater, according to a July 12 report by real estate information provider CoreLogic. That makes them candidates for short sales, even if they dont have delinquent loans, because their mortgage debt is greater than their resale value.
The average negative equity for homes with second liens was $82,000, compared with $47,000 for single-mortgage homes, Santa Ana, Calif.-based CoreLogic said.
Its very much like hostage situations, Sam Khater, CoreLogics senior economist, said of second-lien holders. Its like an all-or-nothing situation in terms of payoff, and theyre very unwilling to bargain.
Banks, facing an onslaught of pending foreclosures, are turning to short sales because their losses are about 15 percent lower than on repossessions, which can take years to complete while taxes, legal, maintenance and other costs accumulate, according to Moodys Investors Service in New York.
Holders of first mortgages are pre-approving short sales, streamlining the closing process, forgoing their right to pursue unpaid debt and giving some borrowers cash incentives of up to $35,000 for relocation expenses.
U.S. government programs have prodded banks to speed up short sales because theyre less damaging to credit scores and property values than repossessions are.
The Home Affordable Foreclosure Alternatives program, known as HAFA, pays servicers as much as $2,200 and homeowners as much as $3,000 for completing short sales. The program was changed in March to increase payments for second-lien holders who agree to release borrower liability, lifting the maximum settlement to $8,500 from $6,000.
For loans guaranteed by Fannie Mae and Freddie Mac, the government-run mortgage companies, servicers now must communicate final decisions on approvals within 60 days of a buyers short-sale request.
Fannie Mae tries to put a limit on negotiations by capping the amount junior-mortgage owners can receive at $6,000 or 6 percent of the unpaid balance, whichever is less. The companys guidelines dont allow any party to the transaction, including the buyer, seller or real estate agent, to kick additional money to the junior-lien holder.
We want to help more borrowers avoid foreclosure through alternatives such as short sales, and we hope that second-lien holders will do their part, said Andrew Wilson, a spokesman for Washington-based Fannie Mae.
While Axon of Franklin Credit Management declined to say how much his company collects on average, he said its higher than the industry standard of 6 percent of the unpaid balance.
We are making our decisions based on characteristics of the borrower, he said. Homeowners are the ones being stubborn. Theyre the ones who got their money and bought their boat, and now they want their boat for free.
The fact is, were willing to discount the obligation, get this behind them and have them fulfill their obligations. If everybody gave everybody what they got for free, we wouldnt have a banking system.