Short Payoff and Loan Modification
Back in the previous cycle (Mortgage Crisis 1.0 we found many times that the senior lender was willing to agree to a short sale or a Loan Modification but the junior lender or second lender was not will to cooperate.
For our purposes, we are defining a short payoff (or short pay) as a transaction in which the lender agrees to retire the outstanding secured debt for less than the full amount of what it is owed. The lender may accept a one time cash payment and/or the lender may accept a new unsecured note.
When we analyse a secured transaction we view it in two parts… the lien and the loan.
If you are negotiating a short sale, you need to release the lien and the loan for each and everyone of your loans. (an exception may be if the buyer is willing to take the property “subject to”.) If you expect problems with your second lender (an you probably should unless you know otherwise) you should consider executing a short payoff campaign vs your second lender before going into default on the first loan.
Loan Modification with Short Payoff
What if you wish to negotiate a Loan Modification and you have two loans secured by California real estate?
You have two approaches to consider – you can attempt a loan modification for both loans or you could commence negotiations for a loan modification on the first and a short payoff on the second.
Because of the complex web of California anti deficiency laws, a seller can execute strategies which can render the second lien holder powerless to collect on their note. In those situations, we have found many lenders amenable to Short payoffs. We have been able to negotiate a release of the lien and release from the loan for just a few cents on the dollar up to about 40 cents on the dollar. In the last cycle it depended on the lender and the investor. (you may be surprised how low some lenders will go and how intransigent other lenders were. However, we learned perseverance can pay off. As long as you can maintain your payments to the first mortgage lender you have a chance to meet your goals. Every case is different and lawyers never guarantee outcomes.
If you intend to negotiate a loan mod on your first you may want to consider the timing of your short payoff campaign. A short payoff may improve your debt to income ratios. It may also adversely effect your credit.
Short Payoff and Short Sale
Because of recent changes to California law, you may wish to consider doing a short payoff prior to beginning your short sale.
Just like the sequencing discussed above for Short Payoffs, before you go into default on your first loan, you may wish commence negotiations for a short payoff with the second.
Once you get the second to release the lien and liability for the loan, you can then decide whether do a short sale or keep the property. Perhaps you may even attempt to do a loan mod with principle reduction. Short Payoffs can be a great option for the owners of California Real Estate who have two loans.