Janis Dodge
Steady demand

If you’re an investor, now may not be the best time to hold a second mortgage or home equity loan.

And borrowers with a second mortgage owned by a lender different from the first, and who are struggling with payments and need to sell their homes to stave off foreclosure also may be out of luck.

Second mortgage-holders, who stand to lose all or part of the loan amount if they allow a sale to go forward when the property’s value has dropped and the sale price will bring in less than the full, combined mortgage amounts, are reluctant to agree to such “short sales.”

But for community banks, amid the turmoil, the second-mortgage market seems to be a bright spot. Despite the difficulties caused by problems in the mortgage and real estate markets, some local lenders are still originating second mortgages.

“We are still doing home equities,” said Janis Dodge, senior vice president for consumer banking at $2.6 billion-asset Salem Five Bank, in Salem, adding that demand has been steady for such loans.

Salem Five keeps most second mortgages in its own portfolio, she said. The bank lends within its existing customer base and underwrites the mortgages “very carefully” – and as a result, borrowers are paying back on schedule.

Leader Bank, a $213 million, Arlington-based institution, recently tightened standards for its second-mortgage loans. Borrowers today must have a credit score of at least 700 and at least 10 percent equity in their home.

The loans are kept in the bank’s portfolio and are
performing well despite today’s shaky real estate market, said bank President Sushil Tuli.

“For small community banks, second mortgages are good business if done right,” Tuli said.

At Leader Bank’s sister company, Leader Mortgage, President James Madigan said plenty of customers still want second mortgages. They’re especially popular for homebuyers who want to avoid paying private mortgage insurance, required by most lenders for mortgages by borrowers who have less than 80 percent equity in their homes.

“The [borrowers’] market has not changed,” Madigan said. “It’s what we are able to offer them that has changed.”

Leader Mortgage has been able to get many customers into the second-mortgage loans they want because it now sells its loans to sister company Leader Bank rather than trying to sell them to a third party on the secondary market, Madigan said.

“Two years ago, Citi was probably getting most of our [second mortgages],” he said. “But no more.”

Citi is one of several national lenders that’s not only buying far fewer second mortgages today, but also originating fewer itself.
More borrowers with second mortgages in markets with declining home values are seeking lender approval for short sales, but not always with success.

Jim Campen, executive director of Americans for Fairness in Lending, said a neighbor of his in Cambridge recently reached an agreement with a buyer for a short sale, but was told it would be two to three months before the lenders could decide whether they’d allow the sale to proceed.

“It does seem like, for whatever reason, it’s extremely hard to get an approval for a short sale,” Campen said. “I am sure the second mortgage complicates things.”

Burlington Amerihome Mortgage Co. Branch Manager Barry Thomas was less circumspect.

“Second mortgage holders are the biggest impediment to short sales, anywhere,” he said.

The reluctance of banks to issue second mortgages isn’t surprising given the subordinate position they hold in recouping losses when homeowners default, which now is happening at record levels.
Thomas said he knows one local homeowner whose home value has declined to the point that he decided to stop paying his second mortgage.
The man believes the holder of the second lien won’t initiate foreclosure since it would gain nothing by doing so – and he’s probably correct, Thomas said.

Short-Sale Shortcomings

Bill Cotter, deputy director of Boston’s Department of Neighborhood Development, said that to see a borrower walk away from a home or a mortgage in the city would be unusual, since demand for housing in Boston so high.

From Cotter’s perspective, if anyone would walk away, it would be an investor who only purchased the property hoping to make a profit.

“The folks we are working with to prevent a foreclosure – they are not walking away,” he said.

In the third quarter of 2007, the most recent data available from the Mortgage Bankers Association, 16 percent of Massachusetts foreclosure starts were on investor-owned properties.

Karen Tseng, a staff attorney at the WilmerHale Legal Services Center of Harvard Law School, which assists borrowers facing foreclosure, said some lenders have only themselves to blame for the declining home values that have led to the need for short sales and sometimes foreclosures.

Inflated home appraisals solicited or accepted by subprime lenders were “rampant,” Tseng said, which is why she is not surprised that home values in areas where they made lots of loans have fallen precipitously.

According to Banker & Tradesman parent’s company, The Warren Group, the median price for single-family homes has take a particularly hard hit on the South Coast, falling 7.2 percent in Bristol County and 8.5 percent in Plymouth County between 2006 and 2007. The latest city of Boston figures available show prices in Boston’s Dorchester and Roxbury neighborhoods – some of those hardest-hit by foreclosures – fell between 6 and 7 percent for single-family homes, and at least twice that much for more commonly sold multi-families, from 2006 to 2007.

Tseng said loan modifications could help both borrowers and lenders, but are virtually impossible to come by because borrowers can’t get their lender or loan servicer to pick up the phone.

A short sale – while far from a lender’s first choice – typically will allow involved parties to keep more money than a foreclosure, she said.

Mark Rodgers, a spokesman for Citi, said that as a home equity lender, the bank has seen increased customer interest in short sales over the past year.

About 30 percent of Citi’s $213 billion mortgage loan portfolio is in second mortgages, which could be at risk in such sales.

Rodgers said that Citi makes more than 80 percent of its second mortgages to borrowers with higher credit scores who have less risk of default. And in fact, even its highest-risk second mortgages showed a payment delinquency rate of just over 2 percent at the end of 2007.
But request for approval of short sales nonetheless has increased, Rodgers said, because of recent declines in home values.

Citi recognizes that short sales often are in the best interest of both borrowers and lenders, he said. “So we typically work with these borrowers to explore short sale resolutions.”

Short sales might not happen for any number of reasons, he added. For example, first- and second-mortgage lenders could value a property differently, or it could be unclear who has authority to allow a short sale if the loan has been sold.

Salem Five, which is still originating plenty of second mortgages, has avoided many short-sale dilemmas because its second-mortgage customers are usually first-mortgage customers too, said Salem Five Mortgage Co. President Ed McDonald.

If any negotiation has to happen, he said, the bank is in a good position, “because it’s just amongst ourselves.”