Second Loans Keep Houses in Limbo

Tom Axon’s mortgage collection company gets about 25 calls a day from delinquent homeowners’ brokers seeking approval to sell their houses for a loss and avoid foreclosure. We’ll help, the staff at Franklin Credit Management tells them, as long as we get paid enough. Axon, working with co-investors, buys distressed home equity loans and similar real estate loans, often for pennies on the dollar. Investors like Axon have to be dealt with whenever a home is sold in a short sale, a transaction in which the lenders agree to accept less than what’s owed on the property. “The short-sale brokers know us—they know we’re not cupcakes,” says Axon, Franklin’s chairman. “At the end of the day, my friend, you signed a contract. You owe money, and we’re willing to reach an accommodation that is commensurate with your ability to pay.”

Home equity loans, lines of credit, and other loans that homeowners take out on top of a first mortgage are called “second liens.” While second liens rank below mortgages when it comes to being repaid, their owners must approve any deal to sell a home for less than the amount owed on it. Tough bargaining by second-lien holders is delaying deals and may be killing some short sales, according to Vicki Been, a New York University law professor and director at NYU’s Furman Center for Real Estate and Urban Policy. “It’s an opportunity for the second-lien holder to charge a price for their cooperation, because it’s needed for a short sale,” she says. “If they’re too greedy, it may squelch the whole deal.”