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Short-sale holdup

By Judy Martel · Bankrate.com
Wednesday, July 25, 2012
Posted: 6 pm ET

What's delaying short sales? In many cases, it's the second-lien holders, according to a study by RealtyTrac for Bloomberg.

Short sales are typically cheaper for banks than repossession, but although 39 percent of homes with more than one mortgage entered the foreclosure process in the first quarter, only 4.2 percent of them made it to a short sale.

Vicki Been, a law professor and mortgage expert at New York University, told Bloomberg that second-lien holders are engaging in tough bargaining tactics that are delaying and sometimes squashing deals, even as banks and the government favor short sales over more costly foreclosures.

Homeowners with second mortgages are twice as likely to owe more than their home is worth, according to CoreLogic Inc. Even if their loans aren't delinquent, they are candidates for short sales because their debt is higher than the home's value.

Second-mortgage collection firms, which often pay pennies on the dollar for a delinquent loan, say they are protecting their own interests and make 80 percent of their money on 20 percent of the loans they own.

At the end of the day, everyone is trying to recoup losses suffered from the housing crisis. But when a short sale fails, the home goes into foreclosure, adding to the glut of unsold homes already preventing the market from full recovery.

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