In his recent paper, "The Hidden Risks of Piggyback Lending," economist Charles Calhoun, an independent consultant and researcher based in Washington, D.
While piggyback and other innovative loan products have facilitated high rates of house-price appreciation, they have also increased exposure to the risks of declining housing values.
Figure 3 Comparison of Interest-Only (IO), Piggyback and 30-Year Fixed- Rate Mortgage (FRM) (Purchase Price: $250,000; Down Payment: 10%; Loan Amount: $225,000) Interest- Piggyback (2) 30-Year Only (1) 3/1 FRM (3) Monthly Payment -- Year 1 $1,054 $1,168 $1,375 Monthly Payment -- Year 4 $1,054 $1,445 $1,278 Monthly Payment -- Year 6 $1,909 $1,656 $1,278 Change Since Year 1 +81% +42% -7% Balance Paid at End of Year 5 $0 $15,034 $16,964 Notes: 1 based on 5.
FINDS PIGGYBACK LOANS MAY POSE RISK TO MORTGAGE SYSTEM
The Hidden Risks of Piggyback Lending" Identifies Risks to Borrowers, Lenders, Investors; Finds Highest Concentrations of Risky Loans in Regions Most Likely to Depreciate
The rise of piggyback loans in recent years may pose a risk to the financial strength of the mortgage banking system, according to a study released today by PMI Mortgage Insurance Co.
In addition to risks specific to borrowers and lenders, piggyback loans "raise reporting, disclosure, and regulatory issues that represent the unintended consequences of a rapidly growing market segment," the paper asserts.