Pre Foreclosure Short Sales: The 2nd Mortgage Doom Loop

Recent Trend in Short Sales:

• 2nd position mortgage holder demands $X dollars more than the 1st mortgage holder is willing to allocate
• 1st position mortgage holder is unwilling to allocate more
• Seller doesn’t have the extra money to bring to closing
  

Doom Loop Scenario #1

• Buyer is unwilling or unable to pay the extra $X dollars on the seller’s behalf
• Buyer walks.
• Takes time to get a replacement buyer, the market continues to decline.
• 1st mortgage company loses much more than the $X dollars they withheld from the 2nd.

Doom Loop Scenario #2

• Buyer is willing to pay the extra $X dollars
• 1st mortgage refuses to let the buyer pay the extra money to the 2nd. 1st says any extra money needs to be added to the purchase price and should go to the 1st.
• 2nd is told they should take what the 1st is allocating. Something is better than nothing. 2nd doesn’t care. Gridlock sets in. The 1st loses much more in holding costs and diminishing value than the $X dollars. 2nd gets wiped out in foreclosure.

Doom Loop Scenario #3

• Buyer willing to pay the extra $X dollars.
• Buyer is an FHA or VA buyer.
• Buyer’s lender refuses to let the buyer pay the extra money, says it violates FHA or VA purchase loan policy.
• Buyer’s lender doesn’t care if the buyer loses the deal. Seller’s 1st mortgage company doesn’t care if they lose more at foreclosure, seller’s 2nd mortgage company doesn’t care that they get wiped out in foreclosure. Everyone loses except the foreclosure attorneys.

Doom Loop Scenarios #4 to #100

• There are many nuances and permutations to the 2nd mortgage doom loop. Too many to list here, but you get the idea.

2nd mortgage are contributing to the many foreclosures in the market. As always, it is best to put the best short sale Realtor on the job. These 2nd mortgage doom loop gridlocks can be often be overcome by sheer persistence and attrition. Your Realtor needs to be highly trained, experienced, committed, caring and dedicated to helping the seller avoid foreclosure.

Attribution: The phrase “doom loop” was either created or popularized by Jim Collins in his landmark book “Good To Great”.