More Defaults Prompt Lenders To Cut Back on Risky Loans
| A rise in defaults is prompting some lenders to clamp down on the use of “piggyback” mortgages, a risky type of loan that helped prolong the housing boom by allowing borrowers to finance up to 100% of the purchase price. Lenders are likely at least to cut back on piggybacks this year because of the difficulty in selling them to investors, said Thomas Lawler, a housing economist in Vienna, Va., who refers to such loans as “oinkers” in light of their poor recent performance. |  |
Piggyback second mortgages typically cover as much as the final 20% of the home’s cost, supplementing a first mortgage that covers 80%. Investors have grown increasingly wary of buying such loans from lenders amid a surge in defaults by recent subprime borrowers. The holder of the second-lien mortgage can hope to collect proceeds from the sale of collateral only if the holder of the first mortgage is fully repaid. In many foreclosure cases, second mortgages must be entirely or almost completely written off.
The subprime mortgage market has mushroomed in recent years as lenders found that investors both in the U.S. and abroad were eager to buy securities backed by such loans. Mr. Lawler, the economist, estimates that 17% to 18% of mortgage-financed home purchases in the U.S. last year involved subprime loans. About half of the subprime home-purchase loans included in mortgage securities last year were piggybacks, according to a recent report by Credit Suisse Group in New York.
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