According to the Washington Post:
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 home buyers this summer, say mortgage experts, and could reduce the volume and availability of piggyback programs overall.
What’s this all about?
In the old days, if you put less than 20% down, you ended up having to get PMI – private mortgage insurance. This was necessary to protect the bank from the chance you would default on the loan.
But, these days, most people take out two loans when they buy a home – the first loan, for 80% of the purchase price, and then a second “piggyback” loan, for another 10%-15%. They don’t have to get PMI, plus, even better, the interest on the second loans is tax deductible!
Obviously, most people need to do this because they don’t have 20% of the purchase price, just sitting there in the bank.
Trouble is, those second loans are usually adjustable rate loans.
And, with increasing interest rates, people may find it harder to pay those loans.
Worse, if home prices start to fall, homeowners may end up finding that they can’t even sell their homes for the 90% or 95% they own on their homes.
That’ll leave the banks in a jam, now, won’t it?
The Washington Post article has the details on what S&P is actually doing, as well as more on proposed federal guidelines that will also reduce banks’ willingness to offer these kinds of loans to consumers.
Less loans available means less buyers.
More information: Piggybacking Onto Trouble – By Kenneth R. Harney, The Washington Post