After the SBA Offer In Compromise and SBA modification, SBA lien
releases are the next most popular service that potential clients come to me for. There are usually two types of
lien release scenarios:
1) The borrower has recently defaulted on their SBA loan, and they
want to know if the SBA is going to foreclose on their home.
2) The individual has filed, and been discharged from, chapter 7
personal bankruptcy, but the SBA lien still remains on their home and the individual wants to know if the SBA will
release their home.
The answer to both questions is basically the same. If the SBA (or
the SBA lender) feels that there is equity in the home, there is a chance that they will foreclose in order to
convert that equity to cash. The decision to foreclose is largely a business decision, meaning that if it makes
financial sense to foreclose, they'll do it. For example, if your home is worth $500,000 and you have a 1st
mortgage of $100,000, and the SBA has a 2nd lien to secure their loan, you can count on a foreclosure since there
is $400,000 in equity in the home. The lender who services the loan for the SBA is required to liquidate that piece
of collateral if some alternative arrangement cannot be worked out. If they don't foreclose, they risk losing part
or all of the SBA guarantee.
Sometimes, the situation is not quite as clear. Let's say your
home is worth $300,000 and your first mortgage is $210,000. First of all, it's usually assumed that your home would
sell at a 20% discount, so the value the lender would work off would be $240,000 (80% x $300,000 = $240,000). Based
on this math, there is about $30,000 in equity in the home. You are now in nebulous territory. The lender would
need to spend $210,000 to pay off the first PLUS the costs of foreclosure. Some lenders would foreclose in that
situation, some wouldn't.
So How Do I Get My Lien Released?
If your home HAS EQUITY (as defined above), you will need to make
an offer for an amount close to the amount of equity in the home. Of course, how much equity you have is debatable,
and trust me, it will be debated. When you make your offer, it's reasonable to look it from their perspective. In
other words, take 80% of the fair market value, then subtract costs of foreclosure and existing liens. Your offer
should be somewhere in that neighborhood.
If your home DOES NOT HAVE EQUITY, you are probably not in
immediate danger of foreclosure. However, just because your home doesn't have equity in it doesn't mean they will
release your home. Many lenders say that they'll just wait until one day when you've paid your mortgage down, and
the value has gone up, then foreclose at that time. Most people don't want to take a "wait and see" approach, and
there is certainly no reason why you can't approach the lender/SBA and make a lien release offer. In most cases, if
there is no equity whatsoever, an offer of a material sum will be considered.