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The Relationship between Second Liens, First Mortgage Outcomes, and Borrower Credit

To help inform the ongoing policy debate concerning the risks associated with second mortgages, the paper rigorously evaluates the effect of second liens on the performance of first mortgages. Using a dataset that combines credit bureau information with mortgage performance data, the statistical analysis separately quantifies the extent to which piggyback and subsequent second liens impacted loan default and prepayment likelihoods for first liens. In a simple direct comparison of first-lien outcomes, piggyback second liens are shown to have substantially increased mortgage default rates, while decreasing mortgage prepayment likelihoods.

via FHFA Working Paper 14-3: The Relationship between Second Liens, First Mortgage Outcomes, and Borrower Credit: 1996-2010 | Federal Housing Finance Agency.

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