A New Look at Second Liens
Coauthor(s): Donghoon Lee, Joseph Tracy.
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We use data from credit report and deeds records to better understand
the extent to which second liens contributed to the housing crisis by
allowing buyers to purchase homes with small down payments. At the top of the housing market second liens were quite prevalent, with as many as 45 percent of home purchases in coastal markets and bubble locations involving a piggyback second lien. Owner-occupants
were more likely to use piggyback second liens than investors. Second liens in the form of home equity lines of credit (HELOCs) were
originated to relatively high quality borrowers and originations were
declining near the peak of the housing boom. By contrast, characteristics of closed end second liens (CES) were worse on all these dimensions. Default rates of second liens are generally similar to that of the first lien on the same home, although HELOCs
perform better than CES. About 20 to 30 percent of borrowers will
continue to pay their second lien for more than a year while remaining seriously delinquent on their first mortgage. By comparison, about 40 percent of credit card borrowers and 70 percent
of auto loan borrowers will continue making payments a year after defaulting on their first mortgage. Finally, we show that delinquency rates on second liens, especially HELOCs, have not declined as quickly as for most other types of credit, raising a
potential concern for lenders with large portfolios of second liens
on their balance sheet.
Source: Working Paper
Lee, Donghoon, Christopher Mayer, and Joseph Tracy. "A New Look at Second Liens." Working Paper, Columbia Business School, 2012.