By Al Yoon - Analysis
NEW YORK (Reuters) - Home equity lenders faced with losses from the U.S. property slump are holding out for more money in distressed sales, slowing transactions needed to support a recovery, real estate agents and analysts say.
These secondary lenders are gaining power in negotiating payments from “short sales,” a growing part of the market where homes are sold for less than the balance of outstanding loans.
Short sales are often cheaper for the primary lender than foreclosure and a solution for homeowners who cannot get their payments reduced by federal loan modification efforts.
But the push by these lenders to recover more of their loans is complicating short sales which agents complain can take several months to complete.
The delays have grabbed the attention of the U.S. Treasury which is writing rules it hopes will smooth the process as it tries to help fix the housing market.
The fallout, a legacy of the era of easy credit when multiple loans were encouraged, comes as U.S. housing is struggling to maintain a nascent recovery in prices.
Analysts fear the first signs of a recovery in demand may drop back during the typically slow selling months of the U.S. winter just as banks put to market thousands of foreclosures delayed by the scramble to make loan modifications work.
For short sales graphic, please click on following link: here
Secondary lenders provide second mortgages and have second claim on an asset following the first mortgage provider.
In theory, secondary lenders should receive nothing if a short sale doesn’t cover the balance on the first loan, said Thomas Lawler, an economist in Leesburg, Virginia.
The rub is that these so-called second-lien, or junior, lenders must release their claim for a short sale to occur, giving them leverage to demand a larger share of what they are owed. Negotiations are often marked by delays that slow sales needed to clear housing inventory overhanging the market.
“Many first-lien holders have become more willing to agree to short sales to reduce losses,” said Lawler, founder of Lawler Economic and Housing Consulting.
“Second lien holders know this ... they don’t have much of an incentive to agree to a short sale and get nothing.”
Some second-lien holders are now asking for 10 percent of short sales, up from payoffs of just $1,000 to $3,000 a year ago, said Angel White, an agent at 360, which currently lists more than 200 short sales from San Francisco to San Diego.
In Irvine, part of the hard-hit Southern California market where short sales make up about a third of listings -- Janice Konkol of FirstTeam Real Estate became a mediator between first and second lenders GMAC and Wells Fargo, which were owed about $617,000 and $215,000, respectively.
GMAC decided to negotiate with Wendy and Brian Jurgenson over their $635,000 offer on a condo they rent if Konkol could get Wells to clear its lien for $10,500. But Wells wanted $25,000, and GMAC then agreed to $21,000, Konkol said.
Wells in a surprise move upped its demand to $50,000, before settling on $30,000, including $9,000 in cash from the Jurgensons. Since they live in the condo and don’t want to move, the Jurgensons agreed to the terms. They plan to close this week, some seven months after making their offer.
“The first was a cakewalk,” Wendy Jurgenson said. “They wanted to go to war for more money, the second. The second really extended the short sale out so long.”
Short sales have nearly doubled at Wells -- the biggest U.S. mortgage lender -- from January to September, and rising volumes have meant a wider range of situations where more or less may be garnered for second liens, said Jeff Johnson, an executive in the company’s servicing business. Unchanged is Wells’ policy of negotiating “reasonable” outcomes for all parties in a short sale, he said.
Treatment of second liens in mortgage modifications has also raised hackles of investors who complain that easing terms of a first loan hurts them and helps junior lenders. What’s more, top junior lien holders -- Bank of America, Wells Fargo, JPMorgan Chase and Citigroup -- as servicers are overseeing modifications on many first liens, presenting possible conflicts, Amherst Securities Group reported in March.
Frustrations run high for the realtors who say they must handle short sales since the listings are prevalent.
The process is difficult since opinions on property valuations vary widely and banks are trying to limit equity losses after three years of price drops. Buyers often walk away and banks face steeper losses as they move to foreclosure, said Ben Bar of Allstate Short Sales in Woodland Hills, California.
“Seconds are frequently problematic, and sometimes deal breakers,” Bar said.
The U.S. Treasury for at least a month has been saying it would soon release guidelines and incentives to speed short sales. Rules will include capping on proceeds to second-liens, Laurie Anne Maggiano, director of policy at the Treasury’s Office of Homeownership Preservation, said last month.
Maggiano declined to speculate on the cap but conceded that some lenders may reject it as too low.
“We expect it will create an industry standard for what subordinate lien holders should expect ... and eliminate the stickiest part of the negotiation,” she said at a San Diego meeting of the Mortgage Bankers Association in October.