The Piggyback Tsunami
Citing recent industry data, at least one mortgage expert and customer advocate is warning customers and lenders about the high default risk associated with piggyback loans, or options when borrowers agree to close two loans together.
Harj Gill, founder, president and CEO of American Mortgage Educators Inc., a consumer advocate group based in Seattle, maintains homeowners should be aware of the risk and "take immediate action to avoid going into default."
He points to the most recent Standard & Poor's analysis of 640,000 piggyback first-lien mortgages in bond pools. Data from the study indicate that first-lien mortgages connected with piggyback loans are 43% more likely to go into default than standalone first mortgages of comparable size, marking a 50% increase in default rate among borrowers with a FICO score of 660 or less.
Piggyback loans, often called exotic mortgages, Mr. Gill said, are one of many nontraditional mortgage products that have put homeowners at risk of foreclosure, more so because as a rule borrowers with little or no downpayment chose this option to avoid paying mortgage insurance. It is a good solution if the goal is to avoid mortgage insurance, he said, "but a terrible long-term strategy."
Typically these borrowers get a first loan at 80% of the home's value and a second loan through a home-equity loan or a home-equity line of credit. In many cases borrowers with adjustable-rate piggyback mortgages are not prepared to deal with the rate hikes.
In addition to risk inherited in the structure of the loan, default risk increases in the current marketplace.
"If borrowers start to go into default in a declining property market, they will be committing financial suicide by having their credit destroyed and still being burdened with a debt well after they lose their homes," Mr. Gill explained.
More at risk appear to be borrowers in metropolitan areas where most piggyback loan holders are concentrated, Mr. Gill said, since these metropolitan areas have "the greatest risk of experiencing a fall in housing prices."
One solution for customers with a HELOC, according to Mr. Gill, is the "Banking Principle" brochure, which helps them ensure their HELOC features the right characteristics fitting to their specific status. The brochure shows how interest on the HELOC is calculated based on the daily balance.
"So instead of having your income sitting in a checking account earning no interest, borrowers should 'park' those funds in their HELOC to immediately reduce the daily balance and thereby reduce the amount of interest they pay," Mr. Gill advises.
Also, to assist borrowers he has prepared a "Critical Report" on refinancing and second mortgage strategies available at the customer information center on the MortgageFreeUSA website. It can serve well brokers, loan officers, lenders and real estate agents who can deliver it to their piggyback customers. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com