Bunch of stuff on 2nd and junior liens, things we watch closely here.
- Alex Ulam has a piece for The Nation on second liens that is worth checking out.
- Lots of reports on the performance of junior-liens with distress first liens. I was going off some outdated testimony. Felix Salmon, courtesy of Brad Miller, has the goods:
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.
There’s more at the link. As I’ve heard from many, the Amherst note clarifies, “a failure to pay the 2nd mortgage has a far larger impact on credit availability than a failure to pay the 1st mortgage.”
- Yves Smith on 2nds. The whole post is worth reading, but I want to flag this data by Josh Rosner:
Anecdotally, it appears that banks use a very aggressive carrot and stick to keep seconds current. They threaten borrowers with aggressive debt collection on seconds. And on home equity lines, which are the overwhelming majority of second liens (see this spreadsheet courtesy Josh Rosner for details of the results from the five biggest servicers, click to enlarge), negative amortization is kosher.
For data junkies, 1 is Citi, 2 is JPM, 3 is BofA, 4 is Wells and 5 is GMAC
For anyone who deals with the idea that “consumption inequality” wasn’t as huge as regular inequality needs to deal with those numbers above.
I find this to be the most toxic part of the mortgage interest tax deduction – our tax laws incentivize this consumption, consumption in a place where bankruptcy laws aren’t clear, ownership and existence of liens are convoluted to investors and multiple conflict of interests on the junior lien holder’s side destroy efficient processes that manage debt when it goes bad.