CAR I think that your use of terminology is loose and does not accurately describe the situation. I am not saying there is not a problem, but let’s make sure we are correct in what is going on.
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What must happen in order for the home to convey is the release of all liens. These are typically held by lenders, (first position, second position, etc) but may also include HOA, mechanics, and of course the taxman.
The fact is that anybody that holds a lien on the property has the right to NOT RELEASE that lien. It may be a pet peeve of yours but that is the reality of the situation. If you want to wipe out the idea of home equity loans and second mortgages then so be it, however wiping out the right of a lienholder to HOLD THE LIEN is contrary to what a lien is all about.
The bottom line is that if a second does not want to release a lien, they do not, or should not have to. If the property goes to foreclosure that second lienholder has the right to purchase that home at trustee sale and make a profit on it. Why shouldn’t they? In no way should they be forced to bow down to a first lienholder at all. If the numbers work better the other way it makes way more sense for the seconds to abstain and let the foreclosure go through.
Once more if the INSTITUTIONS were not backstopped and pumped full of money they may be much more apt to have rolled over and taken the money. However most second lienholders have already written off the defaulted second anyway so they are playing with house money and don’t give a hoot if they hold up the short sale.
In one sense I agree and am frustrated by the process but in another way eliminating the position of a lienholder and forcing them to forfeit the lien altogether based on a higher priority lien making more profit is not right.
So lets go back to the point you were making. It is up to the lienholder in the first position to decide what they want to do in order to make the sale happen. If they only want to dole out a litle bit to the second lienholder then they can make that choice and risk that the sale will not happen because the second will not release the lien. If they want to dole out more then they can.
Now what the FBI may or may not be investigating are cases of fraud where payouts were made and not reflected in the final HUD. I have had some cases where extra money was needed from someone to get the second to rollover. Whether it came from the first, either broker in terms of reduced commission, or the buyer or seller, it came and it was recorded in the final HUD.
So could there be a better process? Yes and there should be but there is not.
My take would have been instead of the government backstopping the lenders so that the lenders had no incentive to make deals, maybe the govt should have simply provided staff to make the decisions and take it out of the lenders hands in exchange for that backstop money. They could have developed guidelines that were percentage based or something like that.
