New, tighter lending practices may make the use of “piggyback loans” obsolete until the current mortgage crisis finds resolve.
Piggyback mortgages, or second mortgages that close simultaneously with the first mortgage, provide extended financing behind first mortgage liens, representing the higher-risk portion of a combo loan.
The main problem with second mortgages is that they are often accompanied by low down payments, and when a homeowner defaults, the second mortgage is the last to be repaid.
That’s the reason why second mortgages come at a premium, but in the current market, no mortgage rate is high enough to make them marketable.
National City, who buys mortgage-backed securities, has a notice on their website that says they will no longer accept second mortgages and some low-documentation loans.
According to SMR Research Corp., a New Jersey-based research firm, roughly 40% of new mortgage debt used to buy homes last year involved the use of a combo loan.