In the past few years the market has seen a considerable minority of borrowers who are behind on their 1st mortgage continue to pay their 2nd mortgage, according to Amherst Securities Group (ASG) analysts.
In a report released today, ASG analysts examined the behavior of borrowers who have two mortgages, where the first loan is in a private-label security (PLS). They did this by matching CoreLogic to Equifax data.
Analysts found that borrowers with HELOCs are more apt to continue to pay on their 2nd compared with those with closed-end seconds. Access to credit is the most important rationale why borrowers are still paying on their 2nd mortgage while remaining delinquent on their 1st mortgage.
In the study, analysts quantified the phenomenon of borrowers who are more than two payments behind on their 1st mortgage, but are still paying on their 2nd liens. They also offer a rationale for it. Specifically, they look at how likely it is that a 2nd lien mortgage is still current while the 1st lien mortgage defaults? Other questions they looked at was where do other debts fall in the hierarchy and do results differ in terms of product type, for instance, prime versus subprime. They also asked why a borrower would pay on a 2nd lien but not on the 1st lien?It is difficult for most non-agency MBS investors to answer these questions, ASG analysts said. Even though most investors use detailed loan-level information on the 1st lien to analyze mortgage performance, they cannot connect the dots between performance of 1st and 2nd liens. This is because the 1st lien is in an MBS while the 2nd is on a bank's balance sheet, and it is hard to “match” the two, ASG analysts said.
Proof of how commonplace this separation of ownership is comes from the Federal Reserve. Analysts cited the fact that for 3Q10, the Flow of Funds data reports $975 billion in outstanding closed end 2nd mortgages (CES) and home equity lines of credit (HELOCs), but only $24 billion (2.4%) of that is in securitizations, according to ASG researchers. The rest is on the balance sheets of banks, thrifts, credit unions and finance companies.
Although somewhat overstated, ASG analysts said these numbers refer to the current state of the market, and 2nd liens in securitizations have performed quite a bit worse than 2nd liens in bank portfolios. Furthermore, there has been no new 2nd lien securitized issuance for several years. However, even if the Flow of Funds data for 1Q07 were used, analysts saw less than 5% is in securitizations. Most non-agency MBS investors, they said, do not have access to the financial and credit profile of the 2ndlien borrowers.
Most borrowers who are delinquent on their 1st mortgage are delinquent on the 2nd. However, a significant minority of borrowers who are delinquent on their 1st are current on their 2nd This is more apt to be true of borrowers with home equity lines of credit than with borrowers with closed end 2nd liens. Borrowers who are delinquent on their 1st mortgage are more likely to pay their auto loan than their 2nd mortgage. They are equally likely to pay their 2nd mortgage and their credit card.
There is also a non-trivial share of borrowers, analysts said, who are current on their 1st and delinquent on their 2nd. The most important reason borrowers who are delinquent on their 1st mortgage are still paying on the 2nd is access to credit. It is very clear that a failure to pay the 2nd mortgage has a far larger impact on credit availability than a failure to pay the 1st mortgage, ASG analysts said in the report.