The popular colloquialism says that if you give someone an inch, they’ll inevitably take a mile.
But turned on its head, that same saying does a fairly good job summing up the current problem of second liens as an impediment to successful short sales: To go a mile, you first have to go an inch.
Foreclosure prevention by way of mortgage modifications, principal writedowns and short sales is not an easy gig. The multiple interests at stake – between homeowners, servicers and potential buyers – are often at odds.
It’s hard enough to get one loan servicer to agree to a principal writedown or short sale. But getting two (or more) invested servicers to each agree to take some degree of loss makes the process exponentially more difficult.
But writing down principal and/or selling short demands exactly that kind of sacrifice: Someone’s losing money on these kinds of deals.
It’s in determining who loses out, and by how much, where things get sticky.
To date, second lien holders have cried foul and put up all possible roadblocks to principal writedowns and short sales, simply because they traditionally have the most to lose. A primary loan servicer may have to endure a haircut on a given loan, but second lien holders tend to get completely scalped.
In this case, should a second lien holder give even an inch, they can be guaranteed to be taken for a very long mile.
One can point to the obvious risks inherent in second-lien origination and servicing, and offer some kind of “caveat emptor” rationale for calling in a marker on a failed bet. But at its core, completely wiping out a second lien holder is simply unfair, and they have every right to put up legal roadblocks to ensure their business interests are as well-protected as possible.
Which is where we come back to the whole “going an inch before making it a mile” analogy.
The short sale and principal writedown processes are a mile long, a marathon really – but it stops dead if and when second lien holders refuse to give an inch. But for meaningful foreclosure prevention to take hold in this country, give an inch they must.
According to our own analysis (see our story in this issue), roughly 70 percent of Massachusetts homebuyers who bought between 2003 and 2007 with a second lien attached to the property are now underwater. And underwater borrowers are far more likely to drown. It’s a massive problem, in this state and elsewhere, and it’s one we imagine will get worse before it gets better.
Something must be done to equitably remove the barriers to second lien servicer participation in the short sale process, namely, the unfair haircut situation described above.
But fear not (we hope). Two of the nation’s largest foreclosure prevention institutions – Bank of America and the United States Treasury – are advocating what seems to be a reasonable solution.
The Treasury’s recently modified Home Affordability Modification Program took a step in providing some incentives to second lien holders to simply give up their positions in certain instances. It was a good first step, though riddled with loopholes and assumptions, as we’ve pointed out in this space.
But the latest guidelines, unveiled by the Treasury recently and enacted on April 1 by BofA, offer a much simpler solution. Under the program, dubbed 2MP and seemingly originally intended to help work out delinquent home equity liens, the holder of the second lien is required to forebear a similar percentage as the first lien holder.
In testimony before the House Financial Services Committee last week, Barbara Desoer, president of Bank of America Home Loans, argued that “Such an approach would provide customers with both affordable payments and a better equity position on both their first and second loans, and would therefore allow them to avoid foreclosure on both liens.”
We agree. When more than one party is required to give an inch, and just an inch, those first few steps toward a mile might suddenly get a lot easier.
