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.

Published: October 12, 2005

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.