Sunday, July 09, 2006

Wall Street Sounds The Alarm

From the LA Times:

Default rate of 'piggyback' loans spurs Wall Street to action

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 first mortgages with 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 fund piggyback deals. 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 piggyback loans found them anywhere from 43% to 50% 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 while avoiding private mortgage insurance premiums. In traditional financings, a borrower with less than a 20% down payment typically must pay for mortgage insurance premiums. In piggyback arrangements, by contrast, the borrower takes out a traditional mortgage for 80% of the property value, but simultaneously obtains a second lien for a portion or all of the balance — and avoids PMI payments.

Banks and other lenders offer a wide variety of piggyback options. For example, an "80-20" piggyback would require zero down payment — an 80% standard first mortgage and a credit line or second mortgage covering the 20% balance. An "80-10-10" would involve a 10% down payment; an "80-15-5," just 5% down.

With their low cash requirements and often-generous credit standards, piggybacks have been wildly popular among home purchasers during the last several years. According to a study by SMR Research Corp., piggybacks quadrupled their market share from 2001 to 2004. In a sample of loans in California markets, according to the SMR study, the percentage of piggybacks exceeded 60% in some cases.
One reason for the higher defaults: Though the interest rate on the first-lien mortgage may be fixed, many of the second liens in piggybacks have been floating-rate home equity credit lines. They are tied to short-term interest-rate movements, especially the prime rate, and are exposed to frequent payment increases as short-term rates rise. The Federal Reserve's steady drumbeat of quarter-point increases over the last year has weighed heavily on buyers who took out piggybacks in 2003 and 2004, when short-term rates were at near-record lows. They have been forced to refinance their loans or find the extra monthly income to pay for the rising costs on their credit lines.


Blogger X-Underwriter said...

The 2nd lien holders will be the ones taking the biggest hit in the downturn. On foreclosure, the 1st lien holder will satisfy themselves 1st and then if anything's left, the 2nd mortgagee will get paid...It's likely that these will be 100% writeoffs.

7/09/2006 12:19:00 PM  
Anonymous Anonymous said...

Who's aquiring all the subprime seconds?

7/09/2006 12:27:00 PM  
Anonymous Anonymous said...

saw 3 properties today in parsippany.One is relisted with a different MSL# and 490K price(maybe worth 200K). Another two are 4 bed/2.5 bath asking for 499k. I am sending them offers of 280K.

The sellers are still day dreaming and it is time to wake them up to reality.

7/09/2006 05:54:00 PM  
Blogger Roadtripboy said...

Anon 6:54pm, Please keep us posted on how it turns out. Personally, I'd love to see the sellers' reactions when they receive your offer.

7/09/2006 09:28:00 PM  
Anonymous Anonymous said...

The Street is a day late and a dollar short.
The steet always trys to serve 2 masters, the banks and the shareholders, thats why they are always behind the damn 8 ball.

WSJ needs to report about the REAL origin of piggyback loans. The damn banking buiness is so competitive and cutthroat these days, one bank started doing the piggyback loans to be unique, to stick out above the competition, then...monkey see monkey do...then FannieMae+Mac got involved with the MBS with China money, and so now you have one big cluster fuck. Why the heck you think Greenspan was giving all those warnings before he stepped down. He was trying to cover his ass. So when this big bubble pops, he going to sit back and say..."see, I told you so."

People, the handwriting is on the wall.


7/09/2006 09:57:00 PM  
Anonymous Anonymous said...



7/09/2006 11:09:00 PM  
Anonymous Anonymous said...

Real-estate firm charged with favoring Jews

U.S. officials charged a real-estate company in New Jersey of violating the Fair Housing Act in favor of Jewish families.
The Department of Housing and Urban Development alleges that Triple H. Realty of Lakewood, N.J., kept minority residents out of the nicer parts of a housing complex, provided them with poorer maintenance and subjected them to rules not applied to the Jewish residents.

Lakewood is home to a large Orthodox Jewish community.

7/09/2006 11:10:00 PM  
Anonymous Anonymous said...

The Party is over. Greedy wall street would offer money to any fool.

Now more as defaults start to surge and house prices tumble.

This lunacy is a result of easy lax money and greater fools.

Here's comes the housng market plunge..

7/10/2006 06:29:00 AM  
Blogger Metroplexual said...

This is where i believe it will unfold like it did not before in the 90's. Now that the risk is seen in the practices of lending the moneyed on Wall Street as well as capital markets will require oversight. The bubble pops here!

7/10/2006 06:29:00 AM  
Blogger Richard said...

this is just one of the many shady aspects of the real estate business. let me give you another one that should be considered illegal. dual agents. how can you represent a buyer and a seller at the same time.

7/10/2006 08:44:00 AM  
Anonymous Anonymous said...

It should be the duty of every realtor to explain their sellers about what the change in the financing environment can do to a marketplace. I am not sure even 10% of sellers understand the reason this market has stalled, ie the 3-4% change in yoy ARM mortgages. I constantly hear sellers saying that interest rates are at historical lows, and they keep referring to the 30 yr FRM at less than 7%. Well if all prior buyers had financed with the 30 FRM, this market should never have gained the 40% it did in the last 3 years. Thats because the 30 yr never went below 5.5% at its lowest point. Mathematically, every 1% change in interest rates equates to a 10% change in houseprice. By that regard, this market should have only appreciated a maximum of 15% due to the 30 yr falling from just above 7% in the spring of 2002 to just above 5.5% in 2004.
In fact with the FRM being at just below 7% currently, it would mean that home prices should only account for inflation increase over 2002 prices, which should not be more than 10% at the maximum.
The price appreciation that occured was entirely due to the ARM loans that went for as cheap as 2% in 2003/04. Those cheap loans have disappeared and have been replaced by ARMS starting at 6-6.5%. Buyers cant get cheap financing in this market anymore.

Realtors will counter with arguments that sales rose in the past even when interest rates rose, eg in the 70s and 80s. Thats true, but incomes also rose at the same pace back then. Currently incomes have stalled and in real terms are even below what they were in 2000. It is a simple matter of affordability. Affordability didnt even exist in 2003, had it not been for those exotic ARMs starting at 1% teasor rates. The naive buyers who bought with exotic loans at teaser rates will have their day of reckoning when their loans start resetting, the first wave of which is about to start hapenning as of now. When they cant make payments at the higher reset rates of 4%+ of their original rates, you will see a wave of foreclosures hit the market.

Try telling a RE agent to explain these simple mathematical facts to sellers....

7/10/2006 03:26:00 PM  

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