Corker GSE Bill Puts Second Liens in Second Place

The first-lien holder on a single-family mortgage will be able to block the borrower from taking out a second lien under a GSE reform bill Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., are slated to introduce today.

If a borrower enters into a credit transaction that increases the combined loan-to-value ratio of the mortgage to 80% or more, the second-lien lender must obtain the approval of the first-lien holder, according to a 154-page draft of the Corker-Warner bill.

During the housing boom, the proliferation of second liens and home equity lines of credit allowed homeowners to get overextended before the crash. Once borrowers defaulted on their loans, the second liens made loss mitigation efforts more difficult. Second-lien holders also demanded to be compensated before agreeing to short sales.

The bill also calls for the creation of a new data base that identifies and tracks second liens or any other subordinated liens issued on a mortgaged residential property.

This data base will notify the senior-lien holder of the existence of a second lien and track the performance of junior liens.

The main purpose of the Corker-Warner bill is to wind down Fannie Mae and Freddie Mac over five years and create a private secondary market structure that would be overseen and regulated by the Federal Mortgage Insurance Corp.

The FMIC would provide back-up insurance for private insurers that provide guarantees on MBS. Private MBS issuers would be required to take a 10% first-loss position on the pools of single-family loans.

However, the bill instructs the FMIC to keep the Fannie and Freddie multifamily loan purchase programs intact. The measure allows the new agency to guarantee timely payment of principal and interest on multifamily MBS.

Corker and Warner are slated to discuss their GSE reform bill at a pressing briefing today.

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