Friday, July 07, 2006

Another Financial Dodo on the Path to Extinction?

It looks like we will soon be able to say goodbye to so-called "piggyback loans". Piggyback loans, like most of the other "exotic" loan types, were created, so it was claimed by the lending industry, to make housing more "affordable". Well, we all know these loan products only made houses less affordable over time and put many people at greater financial risk. Anyway, if these types of loans go the way of the Dodo then even fewer people will be able to "buy" their dream Marin POS at today's prices. To the extent that people used to save money for a down payment, these loan types are one of the reasons why the US savings rate is negative. Don't be a Dodo.
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.

As of July 1, the most influential ratings agency in the mortgage arena, Standard & Poor’s, 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 homebuyers this summer, mortgage experts say, and could reduce the volume and availability of piggyback programs overall.

The reason for the change 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.

Piggyback plans were developed as a creative response to soaring home prices and borrowers’ desires to stretch their down-payment cash. According to a study, piggybacks quadrupled their market share between 2001 and 2004. In a sample of loans in California markets the percentage of piggybacks exceeded 60 percent in some cases.

If you were hoping to make a windfall on your house, then you have to 'sell now before it's too late'. If you are a buyer, then it behooves you to wait as the deals will only get better and better. That implies a deadlocked market which is pretty much what we have now in Marin. So maybe the market is rational after all.


peterbob said...

I believe that it has been the exotic mortgages and other loose lending standards, rather than low interest rates, that has pumped demand for housing. As lenders tighten up, demand will fall a lot.

Lisa said...

I bought my first house in 1996 and sold in 2004. When I bought, I had to document my income, how long I had my savings, 6 months cash, etc. It was pins & needles getting a mortgage approved, and banks would loan based on 2.5 or 3.0 times your gross income. Period. Most of my friends who have recently bought would never have qualified for loans under the "old standards." If the banks get serious about tightening standards, no one will be able to "afford" these prices. Sit back and enjoy the show...

Cindi said...

I'm not sure what kind of loan product you are referring to with "Piggyback loans"? After 21 years as a mortgage lender - I only know that term within residential lending to refer to a second mortgage that is closing simultaneously with a first mortgage, either as a purchase transaction or a refinance. When a second is done alone - it is called a 'stand alone'...Were you referring to another type of loan product? And - again after 21 years in the biz - it's helpful to see that any loan product is just that 'a new product', as in any industry. Part marketing/part niche filler.