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Inside Washington (01/11/2011)
* WASHINGTON (1/12/11)--The Federal Deposit Insurance Corp. is considering a proposal to require big banks that own both servicers and home equity loans to disclose to potential investors—prior to the packaging and sale of the loans--what would happen to the second-lien if the first mortgage comes under distress (Marketwatch Jan 11). Holders of the home equity loans often fail to disclose to investors what their arrangement is on the home equity loans with the corresponding owner of the primary loans. Critics say this lack of transparency is among the reasons why large servicers block modifications to mortgages even when bondholders agree to lower payments for borrowers. Most home equity loans are held by large banks, which also own the large servicers. Observers argue this creates a conflict of interest within the marketplace because banks veto the proposed modifications to primary loans to preserve the home equity loans. Regulators are considering addressing this issue by requiring banks issuing primary mortgages for securitization to disclose what would happen to the second lien if the first mortgage becomes distressed …


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