Second Liens Are Second Class Citizens

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WE’RE HEARING the Corker-Warner GSE reform bill will really drive up the cost of plain-vanilla mortgages.

The bill drafted by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., requires the underlying mortgage to have deep private mortgage insurance coverage. On a mortgage with a minimum downpayment of 5%, the MI would have to cover the 30% of the principal balance.

Plus, the MBS issuer has to take a 10% first-loss position. On a $100 million securitization, it appears the issuer would have to back up the deal with $10 million in capital.

That is an awful lot of loss protection for the types of mortgages being underwritten today.

During a conference call Thursday, KB Home president and chief executive Jeffrey Mezger noted that mortgage credit remains tight.

A long-running joke is that “mortgage companies never make a bad loan at the bottom of a cycle,” he said. But it is really the best to lend “because prices are rising and markets are firming.”

Looking at the Corker-Warner bill—you have to say that joke applies to Congress, too.

In return for all the upfront capital and private MI coverage, the federal government will provide a backstop for MBS investors through the creation of a Federal Mortgage Insurance Corp.

FMIC will regulate and oversee the new securitization market that will evolve over five years as Fannie Mae and Freddie Mac are wound down and liquidated.

It will approve MBS issuers, servicers, private MI companies and bond guarantors.

And FMIC will establish an insurance fund to cover losses absorbed by private investors that purchase MBS backed by FMIC.

On top of this protection, the lawmakers made sure home equity lenders would not undermine the safety of the first mortgages.

If a borrower wants to take a second mortgage that increases the combined loan-to-value ratio of the mortgage to 80% or more, the second lender must obtain the approval of the first-lien holder.

During the housing boom, the proliferation of second liens and home equity lines of credit allowed homeowners to get overextended before the crash.

Investors found that second mortgages not only erode the borrower’s equity but increases their likelihood to default.

So this is Congress’ first stab at GSE reform. It appears this makeover of the traditional conventional conforming mortgage market will result in a more expensive mortgage product. One can only hope that FHA remains an option.

MOST READ/EMAILED: Same story got both distinctions this week. That was Austin Kilgore’s story on Chase’s servicing layoffs. Everyone is wondering when the shoe is going to drop and the hot niche of the business switch over from servicing to originations. With the sharp pickup in purchase mortgages and the gradual slowdown in foreclosures and shadow inventory, it may be getting closer to the moment.

OH, THOSE VINERS: Who is the king of the Mortgage Grapevine? Loantomater has staked claim to that distinction in this thread. But let’s just say his claim to the throne is being disputed. Don’t read this thread if spicy language offends you! But it is a good example of lively discourse and internet flaming, as many of the Vine threads are.

BLOG OF THE WEEK: This week we salute new “What We’re Hearing” blogger Don Kracl of Mortech, who substituted for Garth Graham, who was on a cruise with his family. Don’s theme is admirable. It is that summertime, especially this summertime, is not the time to embrace the Gershwin “livin’ is easy” mantra. Rather, it is time to get busy, with a busy real estate market and a busy purchase mortgage market out there.

SHOUT OUT: Any company in the mortgage industry that hires 10 new people gets a shout out from us as we work our way into a more robust recovery. This week the shout out goes to Wisconsin’s Inlanta Mortgage, which has hired 11 people. That includes four new loan originators and seven support staff. On the sales side, loan officer David Brussat joined the Janesville, Wis., branch. Loan officers Cindy Breternitz and Stephanie Gador joined the Overland Park, Kan., team, while loan officer Laura Schamberger was welcomed to the Cedar Rapids, Iowa, office. The Ocala, Fla., branch added processor Lori Meaney and the Indianapolis South branch hired Amy Walters as an administrative loan officer assistant. In Marshfield, Wis., Rachelle Bottlemy joined as a junior processor and Joel Viterna was added in Overland Park as a mortgage planner. The corporate office in Brookfield also added three new employees to its team. Junior processor Linda Sarandos joined the central processing department and loan coordinator Alysia Berg joined the administrative department. Underwriting also hired Roxanne Paulin.

Mark Fogarty is editorial director of the SourceMedia Mortgage Group and has been commenting on the mortgage market since 1984. Brian Collins is the group’s senior editor and D.C. bureau chief. He has worked the mortgage beat since 1988.