Why Have Piggyback Mortgages Disappeared?
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We usually define a “conventional” mortgage as financing with 20 percent down. Since most people don’t happen to have 20 down much less 20 percent plus closing costs, there has always been a market for mortgages that somehow require fewer dollars up front.
The way you get loans with less down is to find a financially-strong co-signer, someone or something that will bail out the lender if you can’t repay your mortgage. Loans guaranteed by the VA, FHA or private-mortgage insurance (MI) all allow borrowers to buy with little or nothing down.
But — and you knew this was coming — insurance requires an insurance premium, so to buy with little down AND without the cost of insurance, borrowers and lenders during the past few years increasingly turned to “piggyback” financing.
With porker financing you get a first loan for 80 percent of the purchase price and a second loan for 10-, 15- or 20-percent of the home’s value. The result is little or nothing down, plus no cost for mortgage insurance.
Who makes such second loans? Sometimes a second lender, but often the very lender who provided the 80-percent first mortgage and also finances a second loan for the same transaction.
Once-common piggyback deals are now increasingly rare. The reason: That second loan is immensely risky. If a home is foreclosed the odds are overwhelming that the entire value of the second mortgage will be lost. Unlike a first loan, of course, there is neither insurance to offset a loss nor the equity represented by a significant down payment to protect the lender.
The evaporation of piggyback loans is a marketplace “correction” that’s long been overdue. Such financing is cute and clever — but only when home values are rising. Since home values do not always rise, the once-popular piggyback loan is now toast, nicely browned on both sides.
With the virtual disappearance of subprime loans — and with a substantial decline in interest-only mortgages, option ARMs and stated-income loan applications — what we have today is your father’s mortgage marketplace: Take your pick: You can get a conventional loan or a mortgage backed by FHA, VA or private mortgage insurance. Exotic mortgages are out, piggyback loans have been barbecued and dull loans that borrowers can actually understand are back.
Unfortunately, some buyers will not be able to get financing or refinancing under the new standards or they’ll be forced to borrow less. That sounds fairly gruesome until you realize that prudent borrowing means fewer foreclosures and a gradual return to normal markets, things which benefit us all.
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Published originally by Realty Times on July 23, 2008 and posted with permission.
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