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Second Lien Underworld

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A legion of second liens lurking among home loans threaten to undermine the secondary mortgage market, according to a new study.

Combined loan-to-values on outstanding residential mortgages are higher than many believe, the report from Equifax Capital Markets said. The study examined non-agency securitized mortgages from the third-quarter 2005 to the third-quarter 2009.

Under-reported second mortgages are at the heart of the distorted view.

Equifax said that one-quarter of Alt-A borrowers had closed-end seconds in July, up from just 10 percent four years earlier.

Average CLTVs on Alt-A loans jumped from 75 percent in July 2005 to 107 percent in July 2009.

“While home price depreciation shows signs of slowing, secondary mortgage market investors still have reason to be concerned about the impact of borrower equity,” Equifax said.

The report also found that Alt-A and prime mortgage borrowers have increased their use of non-mortgage revolving credit lines — a characteristic previously limited to subprime borrowers. As of July — 22 percent of Alt-A borrowers utilized at least 80 percent of their revolving credit lines compared to just 10 percent in July 2005.

One-third of Alt-A borrowers had a home-equity lines-of-credit as of July, while the rate was 45 percent for prime borrowers.

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