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A new study has come out that shows those using a piggy back mortgage have a 43 to 50 percent  higher risk of default than those who use just a traditional loan to finance their purchase. A piggyback loan is where the borrower takes out a traditional 80% mortgage and then adds at closing a 20 percent home equity loan or line of credit.

The piggyback loan allows the primary mortgage to avoid PMI insurance while letting the borrower access the additional capital to make the purchase. They are used more often in the states that have seen the highest appreciation. It is estimated that in parts of California these loans account for over 50 percent of the lending in the state.

As of July 1, the most influential ratings agency in the mortgage arena, Standard & Poor’s Corp., has upped the ante for lenders who seek to fund piggyback deals through capital market financings. The move is likely to raise interest rates and fees for some homebuyers this summer, mortgage experts say, 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 the performance of piggyback loans found them anywhere from 43 percent to 50 percent 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 (PMI).

In traditional financings, a borrower with less than a 20 percent down payment typically must pay for mortgage insurance.

In piggyback arrangements, by contrast, the borrower takes out a traditional mortgage for 80 percent of the property value, but simultaneously obtains a second lien for a portion or all of the balance - with no PMI payments.
read the rest of this outstanding article by Ken Harney at the baltimoresun.com.

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