Do second liens stay current when first liens default?

By Felix Salmon
March 29, 2011

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.

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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.

10 comments

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Felix, that 6% number is kumquat to the other numbers’ Bayesian oranges. It isn’t conditional on the first mortgage being delinquent.

Posted by absinthe | Report as abusive

That’s true, but the vast majority of modified firsts were delinquent at some point.

Posted by FelixSalmon | Report as abusive

It is not true that the statistics range from 6% to 64%.

The 64% number is for 1st mortgages “30-59 days delinquent”; exactly zero of these contribute to the statistics of the table you present, which is for 1st mortgages 60+ and 90+ days delinquent. So we have 64% for 30-59 days delinquent, and (considering the number of observations involved) 35% for 60+ and 31% for 90+. There is no way demonstrating that these numbers are inconsistent without further data.

What about that 6%? You missed absinthe’s point. Let A be the event that the 1st lien is delinquent. Let B be the event that the 2nd lien is current. The Lowman and Philly numbers are statements about P(B|A). The 6% number is a statement about P(A|B). They are completely incommensurable.

Posted by Greycap | Report as abusive

Ah, yes. Good point. Shall take myself off to Remedial Statistics. Sorry.

Posted by FelixSalmon | Report as abusive

“The Lowman and Philly numbers are statements about P(B|A). The 6% number is a statement about P(A|B).”

Don’t you mean P(B|C) where C is the number of first liens (including delinquent, modified and non-delinquent)? So the 6% figure can be made comparable to the Lowman and Philly numbers if we have a good estimate of the fraction of delinquent first liens in the OCC data.

Posted by csissoko | Report as abusive

As someone who works for a bank I’d just like to point out that every person who stays current on a 2nd while falling further and further behind on a 1st is probably making a mistake.

I get that 1st payments are usually much larger, I get that home equity lines may offer some undrawn capacity (only until the creditor becomes aware of the cross default.) Still if you’re going to lose your house (and 95% of people who fall 90 days past due on a 1st will) wouldn’t you be better off saving that 2nd lien payment money for your 1st months rent and security deposit?

I stand by my theory that nearly all people who pay their 2nd while not paying their first are being (legally) tricked by the bank who owns the 2nd. IE pay us something now and we won’t ruin your credit (but your 1st lien holder will.) Pay us something now and we will agree not to start forclosure procedings for 3 months (because we won’t see a dime in the event of forclosure anyway.)

It’s a total sham.

Posted by y2kurtus | Report as abusive

Correcting my previous comment:

C is all first liens that also have second liens in the OCC database. The fact remains the numerator here is measuring current second lien loans, just as the Lowman and Philly data are. The problem is that they’re all measuring current second liens as a fraction of different populations.

Posted by csissoko | Report as abusive

I don’t understand Amherst’s logic. Why does a failure to pay the second have a greater impact on credit availability? It would be nice to know the reasoning behind their statement.

I do wonder how much the impact of deficiency judgments might have on any propensity to continue paying the second. It’s worth keeping in mind that most anti-deficiency statutes only apply to first mortgages. Lenders holding a second mortgage can pursue borrowers other assets. Given that many seconds are relatively small versus the first, the probability of recovery might not be all that small. Perhaps that’s a reason that the banks continue to carry these loans at what seems to outside observers at ridiculously high valuations.

Posted by TomLindmark | Report as abusive

Banks carry the loans at a high valuation because there current. It’s pretty tough to justify writing down a secured loan before it becomes past due.

The problem is that when it does become past due the recoveries are very small… most commonly zero becasue the first mortgage holder takes all the equity leaving the 2nd unsecured.

After that happens, after the borrower has lost a house to forclosure and the 1st lien holder takes title to the property for the amount owed on the 1st lien then the 2nd lien holder will say O.K…. you owe us $20,000… in theory we could wait until you have some assets to chase after you get your life back togeather but really we’ll take $2,000 now… any way you could borrow that from your brother, parrents, kids, anyone? If you can we’ll write off the other 18k and you’ll be done with it.

Otherwise the loan will get sold to some ambitious collections company for 5 cents on the dollar. Those sharks will then proceed to hound the people until they agree to pay 7-10 cents on the dollar or file bancrupcy. It’s an ugly thing.

I’m all for 20% down payments… though it means that prices will probably come grind down for another year or two.

Posted by y2kurtus | Report as abusive

TomLindmark, I assume because the recovery levels on 1sts are higher. So if you are on record as having eventually lost the lender more then naturally it will affect your rating more.

y2kurtus, want to check one more assumption. I was always under the understanding it was sort of like a corporate bankruptcy. Ie that any secured creditholder that has been defaulted on can foreclose but that the cash realised from the seizure and sale would flow to the creditors following a standard waterfall model. I say this because it seems to me there is a bit of confusion as to whether seniority matters BEFORE foreclosure is completed.

Posted by Danny_Black | Report as abusive