Wednesday, December 15, 2010

Strategic defaulters opt to continue paying on second liens

OK, this didn't seem logical to me.  Why people continue to pay on a second lien if they are not paying on the first.  Answer is that second is sometimes a HELOC and they home owners want to retain the ability to withdrawal more equity if needed.
The data contradict the hypothesis that consumers would strategically default on a second lien and keep their first lien current to reduce their monthly payment and thus avoid a foreclosure, the white paper said. Instead, a far larger number of households do the opposite; that is, they default on their first lien — thus risking a foreclosure — while keeping their underwater second-lien mortgages current.
The reason?
The authors hypothesized that borrowers have incentives to keep their second lien current — after having stopped paying their first mortgage — in order to maintain their access to credit through the HELOC.
The study also found that the size of the unused line of credit is an important factor. Homeowners with larger credit lines are less likely to default, as they are motivated to maintain their access to the credit line
Read it all

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