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Bloomberg reports today on Fed findings that state that (OMG!) piggyback mortgages are making it harder for homeowners to modify the terms of their existing first mortgages. No sh&$ Sherlock. Really? This is newsbreaking stuff here. 2nd lien holders who purchased piggyback 2nd mortgages are in a terrible position, althought it may be in their interest to get the first loan modification done, especially in bubble states where they’re basically holding air.

What are Piggyback 2nd Mortgages?

For those of you not overly familiar with the parlance of the early 2000’s housing boom, a piggyback mortgage is a 2nd mortgage used at the time of purchase (or refinancing) so that the first mortgage is kept below 80% of the value of the house to avoid mortgage insurance costs. The 2nd, piggyback mortgage makes up the difference of the financing, usually 100% to make it cheaper to buy (um, borrow) a home from the bank.

These loans were super-popular because it allowed you to either 1) by a home with no money down or 2) refinance and pull cash out of your existing home up to 100% of the property value.  Granted you’re now stuck with a huge loan and often with an adjustable rate first loan and a high-interest rate 2nd, but you got the cash and you were happy.

Until things started to get nasty.

Most Piggyback 2nds Aren’t Worth the Paper They’re Printed On

Nowadays, these piggyback 2nds are litterally unsecured debt.  Like a credit card.  The property values where this type of financing was popular (CA, FL, NV, AZ) have tanked more than 20% in most places rendering the 2nd lien completely unsecured.  Because the 2nd lien is subordinate to the first, they have no right to the devalued property ahead of the first lien holder in the event of a default.  So they just sit nervously chewing their nails and hoping the monthly payments continue to roll in until the tide starts to rise again.  That’s a long time to be biting your nails.

Companies like Wells Fargo, who hold millions of dollars in 2nd mortgages in states like California are very jumpy because these piggyback mortgages are starting to default at alarming rates.  More people are figuring out that they’d rather just not pay a loan that is $100,000 more than the value of the home and are walking away.

Piggyback Holders Make Loan Modifications Tough

There are several reasons that piggyback mortgages make loan modifications tough (and short sales for that matter).  First, is the overwhelming complexity of trying to get approvals lined up.  Most piggyback mortgages are not held by the originating party and therefore the servicing companies have to track down the final holder of the note and get approvals to allow the note to be subordinated to a new first mortgage (the one being modified).  If the 2nd mortgage is in some type of security that has been sliced and diced with many investors holding some interest it can be even tougher.  Second, as we’ve already covered, the 2nd lien holder is already in a precarious position due to the plummenting house values.  And a loan modification request is a sure sign of a borrower in distress which doesn’t bode well for the 2nd lien holder if the market keeps dropping.  The 2nd mortgage holder may decide that they’d rather take their chance with a foreclosure now and try to recoup something out of the deal instead of waiting as the housing market continues to tank.

Piggyback Holders May Want to Consider Approving Some Loan Modifications

2nd mortgage holders may consider allowing loan modifications in situations where either they have no options.  Such as a home that is completely underwater and they’re left in a position where the note is now basically an unsecured debt.  In this instance their only chance at recovering the debt is to give the homeowner the best chance at repaying it.  This chance can be improved by allowing the first mortgage to be modified to provide a more manageable monthly payment.  (But this is a bit of a pipe dream, since more than half of all modified mortgages are still defaulting.)

Alternatively, if they have a very good security position they may consider allowing a modification because they’d rather make the money on the interest and servicing while knowing that they’ll be compensated to one degree or another in a foreclosure proceeding.  (This, again is a bit of a pipe dream because I can’t think of too many areas where properties have appreciated to the point where original 100% financing is now, say, 85-90% of the home value.)

Piggyback Mortgage Holders are Going to Eat It - Big

Wells Fargo and other holders of millions of dollars of second mortgages are going to find themselves taking massive losses on these portfolios over the next several years.  With the housing market continuing to tank, the likelihood of cram-downs as a relief tactic increasing, and the job market crashing it is easy to make an argument that most of these 2nd mortgages aren’t worth 10 cents on the dollar.

Not that it won’t be deserved.  If you were out there buying up portfolios and pools of piggyback 2nd mortgages with 100% financing to people with 580 credit scores you deserve to eat it.  It’s just too bad that the taxpayers will end up paying for your bad decisions too.

Advertisement: Learn how you can do your own loan modification, click here.

The current financial crisis affects everyone. No where, however, has the impact been more striking than on the middle-class.

“The gap between the ‘haves’ and the ‘have-nots’ is widening for families with children in the United States,” said Bruce Western, professor of sociology of the Multidisciplinary Program in Inequality and Social Policy at Harvard University. And primary author of a new study exploring income inequalities in the middle class during the past 30 years. “Inequality for these families has grown faster than the combined rates of inequality for all families and for men’s hourly wages.”

Results of the study, “Inequality Among American Families with children 1975-2005” indicate that several factors have contributed to the increasing stratification among the middle class. These factors include the growing income advantage of college graduates and rising number of single-parent households. The effects of these factors were somewhat offset by the the increasing rate of women’s employment and higher educational attainment among parents.

Current economic conditions may be slowing the rising tide of single parent families. A poll conducted by the American Academy of Matrimonial Lawyers (AAML) reveals that the number of divorces actually declines during periods of economic turbulence.

“The reason that the economy has such an enormous impact on divorces is that most people in the middle-income brackets are getting by on whatever income they have. They’re just getting by,” Bonnie Booden, a family law and divorce attorney in Phoenix, AZ told MarketWatch.

Circuit courts across the country are seeing notably fewer divorce and legal separation filings, MarketWatch reports. According to the AAML, more than one-third of members responding to the poll say they typically see a decrease in the number of divorce cases during economic downturns.

This is good news for families, children and the economy in general because the incomes varied the least among two-parent families according to the inequality study. Income inequality was greatest in single-parent families without a working mother. Unfortunately, the gap between high and low income families increased across all family groups during the 30-year period studied. The effect of the economic slowdown on the middle-class is important because it is a large and vibrant middle-class that purchases many of the products and services making up the bulk of the American economy. Without them, the economy continues to struggle and shrink.

“Our research suggests a broad increase in income insecurity that goes beyond low-skill workers and single parents and extends to families from every class,” Western states. “The polarization of family incomes among this generation has implications for the social and economic mobility of future generations and suggest the further erosion of the middle class in in years to come.”

Dear Debt Adviser,

Would my 82-year-old mother be better off filing Chapter 13 bankruptcy for $60,000 in credit card debt or doing a reverse mortgage to pay it off?

She already has a home equity line for $60,000 that she used to pay down previous debt.

If she declares bankruptcy, can she later do a reverse mortgage if she can’t live on what is left over?

Dad always took care of their bills, and she has made some bad mistakes financially since he died. I live across the country and didn’t realize how bad it was until it all started catching up to her as she ran out of money in savings.

Thank you very much for any help.

- Jana

Dear Jana,

My mother will be 87 this year, so I understand your concern and desire to help.

Just be sure that your assistance does not include any direct financial help from you unless you can afford to make it a gift, not a loan or an advance on a possible legacy.

(more…)

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