Conducting a Short Sale..? BEWARE of Franklin Credit

Beware of Short Sales with Franklin Credit in the second lien position. (We haven't worked with them in the first position, so I can't comment on that.)

Our seller was a single mother who bought a condo in Chula Vista, one of San Diego's hardest hit areas. She has run into financial troubles and is not able to afford her home anymore. Both of her loans are purchase money loans, meaning they were non-recourse. The first with ASC and the second with Franklin Credit.

ASC was owed almost $351k and we negotiated & receive an approval of a $217k payoff (A $134k loss), with a payoff to Franklin of $3,000 (above average for many seconds). At that payoff, about an $80k loss. Franklin declined this offer and declined further offers at $5k and $10k. In a couple week period of unreturned phone calls, unknowledgeable "loss mitigators", and declines, we began contacting upper management.

We went all the way to the CFO, CEO and COO of Franklin Credit. Eventually, we were able to correspond with the COO (through his assistant). They countered back at full repayment of the second at over $700/month. We explained that there's a reason our client was behind on payments and completing the short sale, she didn't have money. Negotiations continued and we were eventually told that they would not agree to a short sale unless they received full repayment of the balance at closing, or in the form of a promissory note. We explained to them that these were non-recourse purchase money loans and they would receive nothing if the property went to foreclosure. They didn't care. We tried to explain our client's hardship and that she was trying to do the right thing by completing the short sale instead of just walking away. They didn't care. No matter what we tried, they didn't care.

One theory we've heard on this is the second mortgage companies that do this will lose less in the end. A lot of the time, the seller DOES sign the promissory note. Even if a huge portion of them go bad (50%+) they'll still end up getting more in the long run from those that take the soft note and pay vs. taking a token of $1,000 or nothing at all at foreclosure.

The "well they'll get zero if there is a foreclosure" doesn't work in many of these cases because people that get to the point where a promissory note is being offered are the kind of people that are actively looking for a solution. They are the kind that will take the promissory note to get out of the situation and most will probably pay it. After all, they are only working a short sale to save their credit in their own minds in most cases. Who wants to save their credit and then go bad on a promissory note in 2 years and ruin their credit again?

The theory is the banks may end up getting more overall if they adopt this position and hold their line. I don't agree with this theory at all and it's unfortunate that they will hurt these homeowners that are facing financial hardships and actively working towards a solution for everyone. In addition, instead of receiving a few thousand and being able to write the loan off, the bank will lose further months of interest and receive nothing at closing.

And even further, they could care less about how it is affecting the homeowner and what their situation is.

From this point further, any client we sit down with in the initial consultation that has a loan with Franklin Credit, we will make them aware that Franklin will ONLY complete the short sale if they receive a full payoff or full promissory note. If the client is not willing to sign that, we will not take on the short sale.

Unfortunately, there are the few clients that we just won't be able to help.

So beware of Franklin Credit and make sure your clients are aware.