Attempts to loosen terms on hundreds of thousands of delinquent home loans may be hindered by so- called piggyback second mortgages that gained popularity during the U.S. housing boom, Federal Reserve researchers said.
Most of the piggyback loans, often used in place of down payments or mortgage insurance, are held by lenders different from the holders of the home loans, making it more difficult to secure approval needed for modifications, according to the study published in the December Federal Reserve Bulletin. Less than a fifth of the first mortgages and piggyback loans made in 2005 and 2006 were held by the same lender at year’s end.
Separation of the piggyback debt from the mortgages “means that for those loan transactions in which defaults occur, loss mitigation problems are likely to be more difficult,” Fed economists Robert Avery, Kenneth Brevoort and Glenn Canner wrote in the study.
Home purchases involving piggybacks fell to 389,154 last year, from a peak of 1.06 million in 2006, about the same level as the prior year, according to the study. Almost 9.9 million new first mortgages, including refinancings, were issued in 2006.
The prevalence of piggyback mortgages, along with traditional home-equity loans, during the housing boom may also limit refinancings as borrowers find they own more than their homes are worth. Refinance applications are at the highest since 2003 because of lower loan rates, according to the Mortgage Bankers Association.
Most piggybacks are probably underwater. These double loans often mean that modifications require two lender's approval. Piggybacks usually had higher interest rates than first mortgages - so they were commonly sold and resold. Like heavily traded mortgages, that were sliced and diced, the piggyback loans can be difficult to track down.
Like many problems involving modifications are getting the paperwork done in time. Lenders never intended to re-write and write-down millions of mortgages. The system was just never constructed for that. Changing the system in mid-stream to prevent total meltdown is showing itself to be incredibly difficult.
One final thing to remember about the piggyback craze during the housing bubble - it pulled the market forward. Now people could jump in to buy at what seemed at a lower price - and with property values jumping by inlfating by double digits it seemed to make sense. People no longer had to save and wait. They could piggyback their loan and jump right into the housing market. Pulling a big group of buyers in ahead of their natural buying time.