Wednesday, March 24, 2010

Ending Second Mortgage Problems

So does this sound like a typical situation. You have a short sale offer on a property that has a first mortgage of $300K and a second mortgage of $100K, but an offer of only $250K. Your issue in getting the short sale approved is with the second mortgage who refuses to release their Notice of Pendency and let the deal close.

So what do you do?

Some beg the second to approve the sale. Some try and get concessions from the lawyer, real estate agents, and first mortgage to appease the second. Yet, this is all begging. I am not into begging.

Here is a situation that works better. Use the Bankruptcy Courts and do what is called a Cram-down or strip-off. This is when the bankruptcy Court removes the secured status that accompanies a mortgage because the property's fair market value does not support the security. Traditionally, in a Chapter 7 Bankruptcy, the Court removes any unsecured debt, but keeps the security interest and permits a debtor to either reinstate the debt and keep the property or allows the creditor to take the property through their security interest. Here, there is no value to secure, so the Bankruptcy Court removes both the debt and the security interest. This is great. Now you can have your short sale approved and thumb your nose at the second mortgage. Maybe if you explain this to the second mortgage (showing your knowledge) and the Bankruptcy Court fees that they will incur in loosing this battle about their mortgage, they will just permit the sale. Just saying.

Be ware - Cram-downs don't work on first mortgages. Moreover, they used to only work in Chapter 13 Bankruptcies. Well there was a case just last year entitled, Lavelle, where a decision permitted Chapter 7 debtors to cram-down their second mortgage just like in a Chapter 13.

Here is to your next short sale approval.