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WASHINGTON – Wall Street is sounding the alarm on one of the most popular ways to buy a house in many high-cost areas around the country – so-called “piggyback” programs that mesh simultaneously closed first-lien mortgages and second-lien credit lines or mortgages.
As of July 1, the most influential ratings agency in the mortgage arena, Standard & Poor’s Corp., has upped the ante for lenders who seek to fund piggyback deals through capital market financings. The move is likely to raise interest rates and fees for some home purchasers this summer, say mortgage experts, and could reduce the volume and availability of piggyback programs overall.
The reason for the change, according to Standard & Poor’s credit analyst Kyle Beauchamp, is that an exhaustive study of the performance of piggyback loans found them anywhere from 43 percent to 50 percent more likely to go into default than comparable stand-alone first-lien purchase transactions.
In a sample of loans in California markets, according to the SMR study, the percentage of piggybacks exceeded 60 percent in some cases.
Standard & Poor’s policy change effectively requires lenders selling piggyback loans into secondary mortgage market bond pools to purchase substantial additional credit enhancements – added protection for bond investors against the higher expected default rates.
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Yet another nail in the RE coffin. The rise in prices have put home ownership beyond affordability, the recent rise in interest rates have exacerbated the affordability issue and a tightening in lending practices will permanently put that new home beyond reach (until prices go down).
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