Study shows delinquent borrowers don’t always default on second mortgage

A study from the Federal Reserve Bank of Philadelphia shows that 20 percent of homeowners that go into foreclosure on their first mortgage continue to make payments on a second-lien mortgage. The story was reported by The Wall Street Journal.

Banks have little incentive to foreclose on second-lien holders, since their debt has little – if any – value. But, surprisingly, the default rate for first mortgages is much higher than that of the second mortgage for the same property.

The researchers found that almost 45 percent of borrowers stayed current on their second mortgages in the quarter following a default. And three quarters later, most of them were still making payments on time.