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A New Look at Second Liens

In: Housing and the Financial Crisis

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  • Donghoon Lee
  • Christopher Mayer
  • Joseph Tracy

Abstract

We use data from credit reports and deed 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: As many as 45 percent of home purchases in coastal markets and bubble locations involved a piggyback second lien. Owner-occupants were more likely to use piggyback second liens than were 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 those on most other types of credit, raising a potential concern for lenders with large portfolios of second liens on their balance sheets.

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This chapter was published in:

  • Edward L. Glaeser & Todd Sinai, 2013. "Housing and the Financial Crisis," NBER Books, National Bureau of Economic Research, Inc, number glae11-1, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12623.

    Handle: RePEc:nbr:nberch:12623

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    References

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    1. Andra C. Ghent & Marianna Kudlyak, 2011. "Recourse and Residential Mortgage Default: Evidence from US States 1," Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 3139-3186.
    2. Ethan Cohen-Cole & Jonathan Morse, 2009. "Your house or your credit card, which would you choose?: personal delinquency tradeoffs and precautionary liquidity motives," Risk and Policy Analysis Unit Working Paper QAU09-5, Federal Reserve Bank of Boston.
    3. Christopher J. Mayer & Edward Morrison & Tomasz Piskorski & Arpit Gupta, 2011. "Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide," NBER Working Papers 17065, National Bureau of Economic Research, Inc.
    4. Andrew Caplin & Anna Cororaton & Joseph Tracy, 2012. "Is the FHA Creating Sustainable Homeownership?," NBER Working Papers 18190, National Bureau of Economic Research, Inc.
    5. Donghoon Lee & Wilbert van der Klaauw, 2010. "An introduction to the FRBNY Consumer Credit Panel," Staff Reports 479, Federal Reserve Bank of New York.
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    Cited by:
    1. Calem, Paul S. & Jagtiani, Julapa & Lang, William W., 2014. "Foreclosure delay and consumer credit performance," Working Papers 14-8, Federal Reserve Bank of Philadelphia.
    2. Ono, Arito & Uchida, Hirofumi & Udell, Gregory & Uesugi, Iichiro, 2013. "A Close Look at Loan-To-Value Ratios: Evidence from the Japanese Real Estate Market," Working Paper Series 19, Center for Interfirm Network, Institute of Economic Research, Hitotsubashi University.
    3. Robert Hockett, 2013. "Paying Paul and robbing no one: an eminent domain solution for underwater mortgage debt," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 19(Jun).

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