More on Second Liens – Ulam on a Crisis, Data on Performance, Holdings.

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 I was going off some outdated testimony.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.

liens.jpg

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.

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One Response to More on Second Liens – Ulam on a Crisis, Data on Performance, Holdings.

  1. K. Williams says:

    Mike, it seems to me that the data from the OCC in Felix’s post is hard to reconcile with your argument that a huge percentage of the big banks’ second liens would be wiped out if we had a more sensible policy on modifying first liens. The OCC says that situations where homeowners are current on their second mortgages while their first mortgage is delinquent or modified account for just 6% of second mortgages. Assuming that the vast majority of modified/crammed-down mortgages would have to involve delinquent borrowers (lest you just be handing out gifts to people who are current on their mortgages), that suggests that even if all the second liens on modified firsts were wiped out, total losses on the seconds would be small, doesn’t it?

    The OCC data also fits with the numbers the banks are reporting on seconds, namely that the delinquency rates on seconds are very low. Yves Smith’s post, by contrast, is not reconcilable with the OCC data, or with the data showing that 65-75% of second liens on delinquent firsts are also delinquent. If the banks are in fact going to great lengths to keep people current on their seconds even while they stop paying their first, they’re not doing a very good job of it, if 75% of second-lien borrowers who have delinquent firsts are also behind on their seconds.

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