Promissory Notes and Second Mortgages

As time marches on and short sales are becoming more and more common, banks are changing their short sale practices. one of the most interesting change in practices has been the rise in the use of promissory notes when releasing second mortgages.

Here's the deal, when a short sale is approved, the second is generally settling for not much -- the first typically will allow them anywhere from $1,000 to $3,000. (Without the short sale, the second will get nothing through the foreclosure process but does have the right to pursue the borrower for the entire amount owed through a judgement later.**) The seconds are deciding that they can push that borrower to sign a long term unsecured loan to pay back a portion or all of the remaining second. Many times these notes are for 10 years with no interest.

Thought I am NOT an attorney, several attorneys have stated that this debt can be wiped away in bankruptcy--- as well as a later judgement may be wiped away.

So why discourage their borrower for completing a short sale? That is an important question--- and i am not sure I know the answer. My belief is that short sales done quickly can help lessen our property value decline and, of course, save neighborhoods. I also believe that short sales save first lenders vast amounts of money. But this trend will encourage borrowers to do nothing--- or just agree to anything-- and later file for bankruptcy. THIS IS BAD POLICY!

Here are a few recent examples:
--- about $180,000 owed on the second, bank asked for $20,000 in cash at closing and $60,000 promissory note
--- about $15,000 owed on second, bank asked for $4700 at closing and remainder on promissory
--- about $35,000 owed on second, bank asked for $5,000 in promissory.

Yes, the second loans were taken out by the borrowers. Yes, the borrowers owe a debt. But I think the cost of not doing short sales and forcing borrowers into bankruptcy is WAY too high.

What do you think?


**in Minnesota-- your state may be different. Check with an expert in your area.

Check out my other posts on second mortgages:
http://helpwithforeclosure.blogspot.com/2009/08/second-mortgages-getting-sticky.html
http://helpwithforeclosure.blogspot.com/2008/12/promissory-notes-and-second-mortgages.html
http://helpwithforeclosure.blogspot.com/2008/12/second-mortgages-getting-harder-to-deal.html
http://helpwithforeclosure.blogspot.com/2008/08/is-bremer-bank-bully-you-decide.html
http://helpwithforeclosure.blogspot.com/2008/06/my-second-mortgage-is-chasing-me-or.html
http://helpwithforeclosure.blogspot.com/2008/02/have-you-been-using-your-home-equity.html
http://helpwithforeclosure.blogspot.com/2008/01/what-happens-to-second-mortgage-during.html