…As we all know, during the housing boom, millions of Americans pulled cash out of their homes in the form of home equity loans and lines of credit. They also used “piggy back” loans in order to get even lower interest rates on their primary mortgages. Now, many of the borrowers in trouble, and many who are so far underwater on their loans that they don’t qualify for any refi or modification, are choosing short sales as a way out. (Short sales are when the lender allows the home to be sold for less than the value of the loan). About 12 percent of all home sales by the end of 2009 were short sales, according to the National Association of Realtors.
In order for a short sale with two loans to happen, the second lien holder has to drop the lien.
If they don’t, and there’s no short sale, the home goes to foreclosure and the first lien holder gets the house because second liens are subordinated debt to the primary loan.
In short, the second lien holder gets nothing. In order to get the second lien holder to drop the lien, the first lien holder generally negotiates some partial payment to the second lien holder. The second lien holder doesn’t have to agree, but more and more are doing so.
That’s all legal.
But here’s what’s not legal and what’s apparently happening quite often recently. Since many second lien holders are getting very little, they are now allegedly requesting money on the side from either real estate agents or the buyers in the short sale. When I say “on the side,” I mean in cash, off the HUD settlement statements, so the first lien holder doesn’t see it…
Banks hold about a trillion dollars in second liens on houses which are “underwater” – these loans are functionally irrecoverable. If they foreclose, the first lien holder will get nothing. If they agree to a short sale, they’ll get nothing. If they write off the loans, they’ve lost a trillion dollars in “assets” which are probably the difference between being open and being seized by the FDIC. Its quite a problem – and it would be no surprise if they were trying to pull a fast one on the side to get some money to offset what will eventually be a massive crash in bank assets.
There is no way out of our housing crisis except to “cram down” loan amounts to market value – and the first and second liens will have to take an equal percentage hit (it, if a home has lost 40% of its value, then the first and second mortgages will have to reduce their principle amounts by 40%). Its either do this, or face an ever rising wave of people who will just walk away from their homes. The credit hit will last, at worst, for three years – to be sure, it will remain on a credit bureau for 7-10 years (depending on the circumstances) but the actual effect of preventing major borrowing will last, at most, three years (and will probably last only a bit more than a year, in most cases). If the banks don’t see reason, then the people will simply do it on their own. And don’t anyone get high and mighty about this – the banks, themselves, are walking away from loans they took for properties which are massively underwater. Its just business, folks.
The houses were never worth the loan amounts. Yes, the consumers who borrowed were culpable, too. But they’ve already taken the hit. As a for-instance that I’ve mentioned before, I’m out – forever – about $130,000.00 on the house I bought in 2005. Never going to see that money ever again. Its ok – its just money. Think of it as rent for my home. But I am legion – there are about ten million people situated as I am, and the number is rapidly growing. Knock down the mortgage amounts to current home values and everyone just starts over again. With the advantage, for everyone, being that people will stay in their homes, thus helping the overall housing market to recover.
We can do it this way, or we can do it the hard way – but the “underwater” loans will not be repaid. Not now. Not ever.
Blogs For Victory 