The great 80–20 loan that allows you to take out an 80 percent loan and then a secondary 20 percent piggyback loan may be going away. Lenders are learning that giving the borrower the ability to avoid Private Mortgage Insurance (PMI) by creating a secondary loan in not worth the trouble and risk.

We all forget in a rising market that some of these tools are there for a reason. When properties were rising by 20 percent a year, PMI was a waste of money. If you got into financial trouble, sell the next day, lick your wounds and take your profits.

However, a slow and declining market now means that those that took out the piggyback loans are probably underwater after closing costs and are at great risk. This is the reason for PMI, even though it does cost a fair bit of money. The lenders are now at risk to a greater degree as are the homeowners. And, the lenders have to show the losses immediately on the piggyback loans, not something they want to show Wall Street.

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.”  via REALTOR® Magazine

Related posts:

1. Why We Might See Another Housing Slowdown if FHA Loans Blow Up
2. FHA Creating Next Housing Bust? 1 in 8 FHA Loans is Delinquent
3. Quarter of All Commercial Loans Coming Due in Next 4 Years Underwater
4. Lenders Buried Under Load of Mortgage Re-Works
5. FHA New Lending Standards For Mortgages and Home Refinances