Do second liens stay current when first liens default?
How many homeowners are current on their second mortgage while being delinquent on their first? When I wrote about this issue last week, I cited David Lowman, the CEO of JP Morgan Chase Home Lending saying that some 64% of borrowers who are 30-59 days delinquent on a first lien serviced by Chase are current on their second lien. That came from his formal Congressional testimony, via Mike Konczal.
But Brad Miller has now sent me a bunch of other datapoints which paint a very different picture.
First up is this paper from the Philly Fed. The numbers here are roughly half Lowman’s 64%: depending on the type of second lien you have (straight second mortgage, home equity line of credit, home equity loan) it seems that somewhere between 24% and 38% of second liens are current when the first liens are in default.
Next comes a research note from Amherst Mortgage Insight. It shows that where the first lien is delinquent, just 12% of second liens are have always been current and outstanding. Fully 73% of seconds have been delinquent at some point, and 15% fall into an “other” category which usually means they’ve been paid off.
Amherst also breaks down the percentages according to lien type: if the first lien is delinquent, then 59% of Helocs have been delinquent, compared to 78% of closed-end second mortgages. This isn’t a pure like-for-like comparison, since there’s a difference between a loan which is performing now and a loan which has never been delinquent. But still, it looks very much as though most second mortgages suffer delinquency if the first is delinquent.
Finally there’s this letter, sent to Miller by the head of the OCC. According to the OCC’s analysis, just 6% of second mortgages were “current and performing but behind delinquent or modified first liens.” (Update: As my commenters point out, this number has a different denominator. In this case it’s 6% of all second mortgages, while in the other cases we’re talking about just the second mortgages which are behind delinquent first liens.)
I’m not going to hazard a guess as to what all these conflicting pieces of information mean, but when the statistics for performing second mortgages behind delinquent first mortgages range from 6% of one thing to 64% of something else, you know that this particular phenomenon is hard to pin down and subject to all manner of statistical manipulation.
It does happen, and it’s pretty clear why it happens: as the Amherst note says, “a failure to pay the 2nd mortgage has a far larger impact on credit availability than a failure to pay the 1st mortgage.” On top of that, first-mortgage payments tend to be large: if you default on them, that clears up a lot of cashflow to pay off your other obligations.
But how often does it happen? That’s much less clear.
Update: Stephen Tenison, the Senior Compliance Officer at Amherst Securities, objected to me posting their research note, so I’ve taken the link down.