Second Liens: How Important?

Abstract

In this article, the authors look at the second-lien issue, demonstrating that just over 50% of first liens in private label securitizations have a second (or higher lien) behind them. This includes simultaneous seconds, subsequent seconds, and both. The presence of a second lien raises the CLTV (combined loan-to-value ratio) by over 20 points and has a significant adverse impact on first-lien performance. The authors also show that the performance of simultaneous seconds is worse than subsequent seconds. The policy implication is that second liens are too important to ignore when considering loan modifications. And if modifications involving principal reductions begin to gain traction, the second-lien issue moves front and center.