Comments on: Do second liens stay current when first liens default? http://blogs.reuters.com/felix-salmon/2011/03/29/do-second-liens-stay-current-when-first-liens-default/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Danny_Black http://blogs.reuters.com/felix-salmon/2011/03/29/do-second-liens-stay-current-when-first-liens-default/comment-page-1/#comment-25503 Fri, 01 Apr 2011 11:55:00 +0000 http://blogs.reuters.com/felix-salmon/?p=7763#comment-25503 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.

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By: y2kurtus http://blogs.reuters.com/felix-salmon/2011/03/29/do-second-liens-stay-current-when-first-liens-default/comment-page-1/#comment-25459 Wed, 30 Mar 2011 13:37:54 +0000 http://blogs.reuters.com/felix-salmon/?p=7763#comment-25459 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.

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By: TomLindmark http://blogs.reuters.com/felix-salmon/2011/03/29/do-second-liens-stay-current-when-first-liens-default/comment-page-1/#comment-25451 Wed, 30 Mar 2011 01:30:10 +0000 http://blogs.reuters.com/felix-salmon/?p=7763#comment-25451 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.

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By: csissoko http://blogs.reuters.com/felix-salmon/2011/03/29/do-second-liens-stay-current-when-first-liens-default/comment-page-1/#comment-25450 Wed, 30 Mar 2011 00:34:43 +0000 http://blogs.reuters.com/felix-salmon/?p=7763#comment-25450 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.

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By: y2kurtus http://blogs.reuters.com/felix-salmon/2011/03/29/do-second-liens-stay-current-when-first-liens-default/comment-page-1/#comment-25443 Tue, 29 Mar 2011 21:04:01 +0000 http://blogs.reuters.com/felix-salmon/?p=7763#comment-25443 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.

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By: csissoko http://blogs.reuters.com/felix-salmon/2011/03/29/do-second-liens-stay-current-when-first-liens-default/comment-page-1/#comment-25439 Tue, 29 Mar 2011 20:14:39 +0000 http://blogs.reuters.com/felix-salmon/?p=7763#comment-25439 “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.

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By: FelixSalmon http://blogs.reuters.com/felix-salmon/2011/03/29/do-second-liens-stay-current-when-first-liens-default/comment-page-1/#comment-25438 Tue, 29 Mar 2011 18:36:13 +0000 http://blogs.reuters.com/felix-salmon/?p=7763#comment-25438 Ah, yes. Good point. Shall take myself off to Remedial Statistics. Sorry.

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By: Greycap http://blogs.reuters.com/felix-salmon/2011/03/29/do-second-liens-stay-current-when-first-liens-default/comment-page-1/#comment-25436 Tue, 29 Mar 2011 16:30:54 +0000 http://blogs.reuters.com/felix-salmon/?p=7763#comment-25436 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.

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By: FelixSalmon http://blogs.reuters.com/felix-salmon/2011/03/29/do-second-liens-stay-current-when-first-liens-default/comment-page-1/#comment-25435 Tue, 29 Mar 2011 15:31:01 +0000 http://blogs.reuters.com/felix-salmon/?p=7763#comment-25435 That’s true, but the vast majority of modified firsts were delinquent at some point.

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By: absinthe http://blogs.reuters.com/felix-salmon/2011/03/29/do-second-liens-stay-current-when-first-liens-default/comment-page-1/#comment-25434 Tue, 29 Mar 2011 15:14:35 +0000 http://blogs.reuters.com/felix-salmon/?p=7763#comment-25434 Felix, that 6% number is kumquat to the other numbers’ Bayesian oranges. It isn’t conditional on the first mortgage being delinquent.

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