REALTOR® Magazine-Daily News-Lenders Consider End to Piggyback Loans

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Daily Real Estate News | June 7, 2007 | Lenders Consider End to Piggyback Loans
In response to a flood of defaults among borrowers of "piggyback" loans — which are taken out, along with first mortgages, by home buyers with little or no cash for a down payment — lenders are demanding greater documentation on such financing or are dropping this option from their menus altogether.

All of this means that investors in bonds backed by piggyback mortgages could endure some pain. Unlike with bonds backed by primary loans, which do not realize losses until the lender sells the foreclosed property, bonds underpinned by piggybacks see the entire balance of the loans written off as soon as the borrower goes into default — after three to six months of missed monthly payments.

"Losses have come in earlier than expected and higher than expected," according to Grant Bailey of Fitch Ratings' residential mortgage-backed securities group, who says while none of the company's investment-grade piggyback bonds have taken a loss to date, "it's probably only a matter of months until they do."

Source: Wall Street Journal, Danielle Reed (06/05/07)

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