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BUSINESS NOVEMBER 27, 2010

Second-Mortgage Standoffs Stand in Way of Short Sales

By NICK TIMIRAOS

Sergio Trujillo thought he could avoid foreclosure when an investor made an all-cash offer last month to buy his one-
bedroom condominium in La Jolla, Calif., for less than the amount he owes on his mortgage.

But a standoff between Mr. Trujillo's lenders over a few thousand dollars threatens to derail the deal, known as a short
sale.

Like many heavily indebted borrowers, Mr. Trujillo has two mortgages: a first mortgage in the amount of $260,000,
which is held by Freddie Mac; and a $50,000 second mortgage, handled by Specialized Loan Servicing LLC. Freddie
Mac will allow no more than $3,000 in sale proceeds to go toward the second mortgage. But SLS says it will scotch any
deal if it doesn't get at least $7,000.

"This is an all-parties-lose scenario," said Brian Flock, Mr. Trujillo's real-estate agent. "There is no housing recovery
when this happens."

Over the past year, real-estate agents, lenders and federal policy makers have
pointed to short sales as one way to revive moribund housing markets while helping troubled borrowers avoid
foreclosure. But for homeowners that took out second mortgages during the boom, getting a short sale approved is
proving to be a nightmare.

Most first mortgages, like Mr. Trujillo's, are guaranteed by government-controlled mortgage giants Fannie Mae and
Freddie Mac or held by other investors in mortgage securities. Second mortgages and other junior liens are typically
owned by banks and credit unions.

Banks are reluctant to write down second mortgages because many are still current, even if the borrowers owe more
than the value of their homes. They may also be able to pursue borrowers' assets after foreclosure.

"If I'm the second-lien holder, I may say, 'You know what, I want to see if I can hold out for a better deal,' " said Greg
Hebner, president of MOS Group Inc., an Irvine, Calif., company that contacts troubled borrowers on behalf of lenders
and servicers.

The result is a "chicken game" between investors that leads to

More
unnecessary foreclosures, said Jon Goodman, a real-estate lawyer and
Q&A: Short Sales Still Hit Owners' Credit
investor in Boulder, Colo.

As of June 30, 11 million homeowners owe more than their homes are worth and an additional 2.5 million have just 5%
equity, according to real-estate research firm CoreLogic. To sell, those homeowners must cover the shortfall or, more
commonly, ask the bank to take a loss via a short sale. The short-sale process remains full of land mines. Loan

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servicers were never designed to handle large volumes of customized

workouts and it can take months to bring loan servicers, investors and
mortgage insurers to agree on a price. Softening home prices create greater
potential for disputes over values. And lenders are wary of fraud.

Second mortgages, however, have become one of the biggest roadblocks.

More than a third of about 1.33 million properties in some stage of the
foreclosure process have at least one junior lien, according to publicly
available data tracked by CoreLogic.

Many seconds and home-equity lines are worth little in a foreclosure because
home prices have fallen so sharply. That gives the second-lien holder
"nothing-left-to-lose leverage," said Mr. Goodman. Banks say they are
approving deals where they can, but borrowers must agree to some form of
debt repayment.

About three-quarters of the $1 trillion in seconds outstanding as of June 30

were held by commercial banks, and of those, more than $430 billion belong
to the nation's four largest banks—Bank of America Corp., Wells Fargo & Co.,
J.P. Morgan Chase & Co, and Citigroup Inc. Forcing write-downs on large
numbers of those loans could significantly erode their capital.

Real-estate agents say some banks are getting better at cutting deals. Wells
Fargo & Co. now dispatches employees in some markets to appraise homes
even before a short-sale offer has been received to help speed potential sales.
Bank of America doubled its staff dedicated to handling short sales to around 2,700 over the past year and began using
an online platform to allow for paperless applications and approvals. The bank says it has approved 70,000 short sales
through September, double the year-earlier total.

In Mr. Trujillo's case, SLS requested far more than the lien was worth on the secondary market, said Mark Johnson,
who oversees short sales for Freddie Mac. "That's always been our challenge—participation from second-lien holders,"
he said. "It's ultimately their decision about whether they want to help us save borrowers in foreclosure." Freddie says
it hopes to negotiate a deal for Mr. Trujillo. SLS declined to comment.

Jeff Gray waited months to complete the purchase of a home in Litchfield Park, Ariz., as part of a short sale, only to see
it fall apart days before closing. Chase, which serviced the first mortgage for Freddie Mac, approved the sale but
wouldn't forgive the second mortgage, which it owned. Chase says it has completed 83,000 short sales since 2009.

Mr. Gray eventually bought another home in the same neighborhood; meanwhile, the short sale was listed for sale by
Freddie Mac earlier this month for $30,000 less than what Mr. Gray had offered.

"It's sad," he said. "The grapefruit tree in front is dead, the grass has turned brown, and the shutters are starting to
fall."

Write to Nick Timiraos at nick.timiraos@wsj.com

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