Pipeline

Exit Fee

Some second-mortgage holders are demanding that distressed borrowers giving up their homes through short sales pay off their junior liens — under the table.

Nancy West, a marketing and outreach specialist in Santa Ana, Calif., with the Department of Housing and Urban Development, said HUD recently conducted a "sting" operation in which a second-lien holder had demanded that $5,000 be paid "outside the close."

Since such a payment would not be disclosed on the HUD-1 settlement form, the first-lien holder — which was taking a hit by allowing the short sale — would not know the holder of the second lien was getting a payoff, West said at a conference in San Francisco last week.

"On short sales, junior lienholders are asking for money and for it to be kept off the HUD-1," she said.

In a short sale, the home is sold for less than the amount owed on the mortgage and the lender accepts a discounted payoff. Normally when a home is sold through a foreclosure or short sale, second-lien holders are not supposed to get paid anything unless and until the first-lien holder is paid off in full.

The government's Home Affordable Foreclosure Alternatives program, which provides incentive payments for lenders to allow short sales, requires that payment by a borrower for a complete release of any subordinate liens be capped at $6,000.

But many holders of second liens are demanding payments larger than $6,000, in the form of cash to release the lien and allow a short sale to take place, West said.

Whatchamacallit

For all the back and forth over what to do with Fannie Mae and Freddie Mac (Privatize them! No, nationalize them!), something as simple as deciding what to call the successor firms (or firm) could have major implications for the mortgage market.

If the names were changed, financial firms' investment guidelines that authorize the buying and selling of Fannie and Freddie securities, as well as the technology systems for trading them, would have to be altered to recognize and accept the new names.

"There are investment portfolios around the world that have investment guidelines that are specifically written in that they can buy Fannie or Freddie paper so if there is something else that replaces them all these investment guidelines have to be changed," said Jay Diamond, a managing director at Annaly Capital Management Inc., a New York real estate investment trust. "What you call them is actually a very critical component."

He spoke at a panel discussion Tuesday in New York sponsored by the Securities Industry and Financial Markets Association.

Another panelist, Mahesh Swaminathan, head of residential mortgage-backed securities strategy at Credit Suisse, agreed that naming is not trivial.

"Things that might seem mundane are actually pretty important," he said. Financial institutions "all have systems where they have Fannie and Freddie in there and if you change it to something else, even marginally different, it would require massive re-engineering of all of that and it's by no means a straightforward thing to do."

So far, little has been said in Washington about the possibility of a name change for the government-sponsored enterprises. Then again, not much has been decided about the future of the GSEs in general.

Since being taken under conservatorship by the government in September 2008, at the height of the financial crisis, there has been much debate about how to restructure the entities, or do away with them altogether.

It's a hotly contested issue on Capitol Hill, and one that isn't expected to be resolved anytime soon, as the financial reform bill that's on the verge of passing doesn't touch on what to do about Fannie and Freddie. And with midterm elections looming, the debate is expected to be prolonged even more.

The Treasury Department has said it will issue a plan for the GSEs in 2011.

The name Fannie Mae derived from FNMA, for Federal National Mortgage Association. The name Freddie Mac, which derived from Federal Home Loan Mortgage Corp., became the company's formal name in 1997.

Foreclosure Spike

One in 78 households received at least one foreclosure notice in the first half of this year, according to data released today.

Nearly 2 million foreclosure filings — which include default notices, auction sale notices and bank repossessions — were reported on 1.65 million properties during the first half, said RealtyTrac Inc. The number of properties receiving a foreclosure filing fell 5% compared with the second half of 2009, but rose 8% year-over-year.

Quotable …

"I don't necessarily think complexity is bad. And not to sound facetious, but you know, horse-drawn carriages were simple, but it doesn't mean we're going to give up our automobiles for that. So I don't think securitization is necessarily bad."