So-called piggy back loans are the latest lending tool to get panned as being used in excess to buy homes buyers otherwise can't afford.

"The Hidden Risks Of Piggyback Lending" by the PMI Mortgage Insurance Co., a subsidiary of The PMI Group, Inc. in Walnut Creek, CA says about 42 percent of home purchase mortgage loan dollars involved piggyback loans during the first half of 2004, more than double the level in 2001.

Piggybacks are particularly popular in high-cost areas such as California, where prices have skyrocketed beyond the reach of incomes and borrowers are increasingly using the loans to stretch to purchase properties.

Piggyback loans get their name from a second mortgage that is "piggybacked" onto a first mortgage to compensate for buyers unable to come up with a larger down payment or any at all.

Just as recent studies have panned over use of interest-only mortgages, zero-down programs, and easy-equity loans, piggy back loans are getting the same high-risk warning attention, in part because they contribute to inflating housing market bubbles.

The potential for risk is that already over-extended home buyers will be left with an upside down mortgage should the bubble burst and prices drop. Worse, economic malaise, which many forecasts call for by the end of 2006, could leave home owners unemployed and unable to pay for both a first and second mortgage.

"Piggyback loans may contribute to overheating in local housing markets," said Charles A. Calhoun, the study's author.

"Initially, they appear to support a rapid rise in housing values by qualifying borrowers for larger loans at higher loan-to-value ratios -- but I expect that as interest rates rise and house price appreciation slows or declines, defaults will rise and borrowers could lose their homes. It's particularly worrisome given that borrowers may not fully understand the risks they face," he added.

If the market turns on buyers, lenders could suffer too.

"Borrowers are able to afford more expensive homes with smaller down payments, but may not be prepared for the increased payments they will face as interest rates rise. Similarly, piggybacks allow lenders to increase profits because they are originating two loans instead of one, but they may not be prepared for the one-two punch of rising interest rates and declining house price appreciation."

PMI says there's a high rate of housing markets at risk and markets that reveal an abundant use of the loans.

"Overlaying concentrations of piggyback lending on top of PMI's assessment of the likelihood of depreciation in the top 50 metropolitan statistical areas (MSAs) reveals a strong positive correlation between the rate of utilization of piggyback loans and market risk," said Mark Milner, chief risk officer at PMI.

Among MSAs ranked in the top 10 in terms of market risk, 7 regions -- all of them in California -- had more than half of their mortgage lending for home purchases in piggybacks during the first half of 2004.

Published: July 13, 2005

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.