Uncle Sam may not be watching, but your lender may very well be. To wit, mortgage stakeholders now have a new tool that uncovers the existence of secondary financing added by borrowers after they have closed on their primary loans.
Identifying second liens is important to mortgage companies, insurances and investors because they could be an indication that the borrower is experiencing financial trouble and has had to borrow even more money to remain afloat.
Of course, the existence of such financing could mean a number of other things as well. The borrower may be borrowing against his equity in order to add even more value by sprucing up his place, for example. Or perhaps he has a grand opportunity to invest in a new business and wants to use his home as his bank.
Whatever the reason, the existence of secondary financing means borrowers with two or more mortgages often have a combined loan-to-value ratio that is too high for their incomes. What's more, borrowers don't normally inform their lenders about subsequent financing. But at the same time, lenders and others would rather know sooner than later that their customers have gotten themselves even deeper into debt -- and in perhaps into worse difficulty.
To protect lenders, LoanPerformance, a leader in residential mortgage data and analytics, has launched SecondLook, a service which identifies, evaluates and monitors the status of home equity lines of credit and second mortgages that are attached to first mortgages. The service provides reports on a monthly or quarterly basis, and when such loans are found, it offers a daily update with alerts to the folks who service the original loans.
And just in case someone thinks they might be able to slip one under the radar, the San Francisco-based LoanPerformance is a subsidiary of First American Real Estate Solutions, which collects property data on 97 percent of all real estate transactions in the United States. Earlier this year, First American launched a companion product, LienWatch, which provides holders of junior liens with an automated method for monitoring a first lien's delinquency status.
"The growing popularity of second liens, and the inability, until now, to identify their presence, has added a significant element of risk for mortgage lenders and investors," said Dan Feshbach, chief executive officer of LoanPerformance.
"Our analysis of outstanding mortgage pools shows that between 23 and 53 percent of first mortgage borrowers add a second mortgage within three years of origination, masking the true risk of the assets being held or under consideration for investment."
Feshbach said secondary encumbrances place investors in mortgages and mortgage securities at a disadvantage, since the true combined loan-to-value ratio may be significantly higher than what is disclosed, due to the addition of hidden mortgages concurrent or subsequent to the first lien's recordation.
SecondLook can identify a wide range of second liens, including so-called "silent" seconds, where the seller finances the second; "piggyback" seconds, in which the originator provides a second simultaneous to closing; "up-sell" or "cross-sell" seconds, where the originator markets a second after closing; or "borrower-initiated" seconds, where the borrower acquires a second after closing through another lender.
When clients provide first mortgage loan information, including borrower and co-borrower name and address, SecondLook automatically returns appended files that describe all additional liens recorded on the properties, including new lien dates and amounts, and an updated loan-to-value (LTV) ratio based on automated valuations or repeat sales indices.