Second mortgagee needs to see some money to release a lien

Q. My husband lost his job about a year ago and after struggling for months to pay our two mortgages, we have finally given up and realize we cannot hold on to our home. The good news is that a friend of one of our neighbors may be willing to buy our home, which would save us a real estate commission.

The sales price would cover most if not all of our first mortgage, but would probably leave nothing for the second mortgage. I think it would be fair to pay each mortgage company something, but I'm not sure it works that way. We want to make sure this deal will work before we enter into a contract with these people. Is there a way to find out if the two mortgage companies will accept something less than what they are owed? Who do we contact? Do we need our attorney to do this?

We just need to sell this house as soon as we can because the stress is not helping either one of us.

A. What you don't tell me in your letter is if the first and second mortgages are with the same company. If they are, you have a decent chance to successfully complete your sale. If the first and second mortgages are with different companies, your chances of obtaining approval for a short sale are dramatically reduced.

Many people bought or refinanced on the 80/20 plan over the past number of years. This means they obtained an 80 percent first mortgage and a 20 percent second mortgage. The homeowner contributed no cash of his or her own. This arrangement worked well as home prices escalated and unemployment was low. When home prices started dropping and jobs were being lost, homeowners found themselves without the cash to fund the two mortgages and to make matters worse, discovered the balance of the two mortgages was more than the value of their home. Hence, the foreclosure explosion.

Mortgages get paid off in the order they are recorded. This is why in most cases, the interest rate on the first mortgage is significantly lower than the rate on the second mortgage. Interest rate is a function of risk. If the second mortgagee doesn't collect a dime until the first mortgagee is paid in full, obviously the second mortgagee incurs a greater risk. In this environment of declining real estate values, this has often resulted in the second mortgagee not collecting anything on their obligation. This leads us to your problem.

If the second mortgagee isn't going to collect anything from a sale, they often do not cooperate in releasing their lien. If they refuse to release their lien, you cannot sell your home. The only motivation they have to release their lien is getting paid something.

You indicate you believe your first mortgagee will receive most if not all of what is due them if you sell now. Your job will be to try and convince the first mortgagee that this property will soon be in foreclosure and the only way to avoid that is to do what is necessary to ensure the sale to your prospective buyers. And one of things the first mortgagee will probably be required to do is to pass some of the sale proceeds to the second mortgagee. This may give the second mortgagee the motivation they need to release their mortgage lien and allow the sale.

Unfortunately, in most cases, none of these workings commence until a contract is written. So, if these folks are interested in your home, write a contract, have all parties sign, then contact each mortgage company, explain the situation and follow their instructions. This can be a very frustrating process so be patient and persevere. You can hire an attorney to assist you with the paperwork, but you can probably do much of this work yourself, which would allow you a little more control over what is going on.

• Attorney Tom Resnick's column appears every other week in Homes Plus. Send your questions to Tom Resnick, 345 N. Quentin Road, Palatine IL 60067, e-mail tdr100@hotmail.com or call (847) 359-8983.