Piggy Back Loans

Feb 9th, 2008 @ 3:13 PM by Alden Smith

One of the things we don’t often hear about are piggyback loans – the loans people take out to make down payments on houses they are buying to avoid paying private mortgage insurance. It is just another sign of the stupidity in the market, when greed takes over and people put their heads where it doesn’t belong.

All this was fine and good in the early part of the decade when things were running smoothly and homes were overvalued. Now, though if you have a piggy back loan plus the regular mortgage payment, and find yourself in a position where you must unload the house to prevent foreclosure, you are in a world of hurt.

Taking out these loans because you don’t have – or want to make – a down payment is like giving a baby a hand grenade. It makes little sense that if you can’t whip out the old checkbook and pay a down payment; the deal is probably just not for you, no matter how much you want the home. This country has a long history of ups and downs, and this one isn’t much different save for one thing. The housing market woes are driving a lot of it. I have yet to see a viable plan for anything that will help clean up this mess. I don’t believe that American taxpayers should shoulder the burden of people who used little common sense in their dealings, either. And I fail to see how the new caps for Freddie and Fannie are going to help very many people. Such is the state of our nation.

Stuart A. Feldstein, president of SMR Research, a New Jersey market research firm specializing in consumer loans, said that 40 percent of loans in 2005 and 2006 were made using this method. Now we are seeing the effects of not only a drop in home values, but we are seeing people who owe much more than the house is worth because of the piggyback loan. I haven’t done the math, but I am thinking 40% is a ton of money. And people with these kinds of loans are going to have an awful time unloading that house, unless they can find someone with deep pockets that just has to have it. Rumors are that a lot of people have tried to make deals with the 2nd lender, only to have them balk, and the home goes into foreclosure. And we get what we have here today…

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