In a typical Minnesota short sale where there is a first and a second mortgage, it is not uncommon for the first mortgage to allow a few thousand dollars from the sale proceeds to go to the second mortgage. A second mortgage is typically allowed between $1,000 and $3,000. Most second mortgages will accept the money and agree to LIEN RELEASE ONLY.
What does LIEN RELEASE ONLY mean? This means that the second mortgage will allow the lien they placed against the property to be removed so the seller may transfer the property to a new buyer. This does NOTHING TO SETTLE THE REMAINING DEBT. The remaining debt will still exist and the second mortgage may continue to pursue the debt via collections and/or legal action. It is rare for a second mortgage to do anything other than harass the seller/debtor via collections. Typically credit unions, smaller local banks, and second mortgages owed over 100K will pursue the remaining debt via the legal system.
EVENTUALLY the second mortgage will send an offer of settlement. Most lenders will consider the debt settled for 20% of the balance owed. The offer is typically time sensitive and getting an extension of more than a few days is very rare.
IF the offer is accepted and the seller/debtor pays the settlement amount most lenders will report the debt as “satisfied” to the credit bureaus and will file a satisfaction of the mortgage at the county.
Make sure you read the language of the offer letter carefully. It should offer “satisfaction” and “settlement” of the debt. If the offer does not specify these items, be careful.
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Mary Alice I have written about this subject on my blog which is also Thesis by the way:) It just amazes me how many Realtors that are trying to do short sales yet don’t know what the heck they are doing. This is an area that is going to come back to bite many Real Estate agents.