Piggyback loans, which fell from favor during the housing downturn, are slowly making a comeback as home values start to pick up, several industry leaders have said.
Piggyback mortgages – when a borrower takes out a second mortgage in the form of a home equity
or line of credit – accounted for 3.8% of the loans originated by surveyed bankers in 2012, compared to 1.7% of the loans for 2010, according to the ABA’s 2013 Real Estate Lending Survey.
The loans were commonly used by borrowers who wanted to avoid paying for mortgage insurance but didn’t have enough money for a 20% down payment. Some of these loans were taken out to finance home improvements; others were part of a subprime product known as an 80/20 mortgage, in which 80% of the purchase price was covered by a first, adjustable-rate mortgage, and the remainder by a second mortgage with a higher interest rate.
But the product declined when values dropped, and hasn’t picked back up due to fear, Vice President of Advisors Mortgage Group Sean Clark told MPA. Since banks are in line after the primary mortgagee, if a foreclosure proceeding begins, they know they won’t get the house, no matter what it’s worth.
“The reason piggybacks went away is values dropped so dramatically, so many of the banks that offered second mortgages out there lost everything they lent,” he said.
As the market stabilizes and continues on its current path, we will see a reemergence of banks offering second mortgages, just as we’ve seen a reemergence of jumbo loans, he said.
“It’s a wonderful product if used properly,” said Bill Kidwell, president of IMMAAG, a mortgage advisory group.
Kidwell says there are few toxic products, there are only people who sell products who don’t vet their clients to see if they are a good fit.
In the case of piggy back mortgages, it could make perfect sense for someone who might be short on the down payment, but can rather pay off the second mortgage rather than going with skyrocketing mortgage insurance.
But the days of 80/20 are over with tighter lending requirements across the board. While some banks will do a combined loan-to-value of 90% on the first and second mortgages, others will only go as high as an 85% combined loan-to-value, which means the borrower has to come up with at least a 10% down payment, and sometimes 15%.