Borrowers stay current on 2nd lien for liquidity: Amherst
Amherst Securities analysts said it appears many borrowers that are delinquent on their first mortgage stay current on the second to retain access to credit and liquidity, especially those with lines of credit as opposed to closed-end second mortgages. "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," according to analysts in Amherst's MBS strategy group. Still, most Americans included in a sample of 1.4 million borrowers who are delinquent on their first mortgage are also delinquent on their second. Amherst used data culled from the subset of first lien mortgages outstanding within private-label, mortgage-backed securities that have at least one second lien. The data came from CoreLogic Inc. (CLGX) and Equifax. Amherst analysts said most non-agency MBS investors find these patterns in loan payments puzzling. And while it is possible to analyze loan-level data on the MBS performance of first mortgages, it's much harder to with the second liens. Also the percentage of second loans bundled into securitizations is a mere 2.4% with the rest staying on the balance sheets of financial institutions, according to Amherst. Because a lender can foreclose on a first mortgage more easily than a second lien, it would seem rational for a borrower to stop paying the second rather than the first. But the benefits of keeping up to date on the second apparently outweigh defaulting on the first. In addition to the ability to maintain access to capital, the payment for a second lien is often lower than the first and consequently easier to pay, Amherst said. Some other reasons may include whether the foreclosure process in the state where the borrower lives is judicial or not, and the potential incentives of firm servicing the loan. Write to Jason Philyaw.