Question about 2nd mortgages

[c1ue]

I was doing my usual news scan of the day, when I was reminded of a question I have held for nearly 6 years:

How do lenders treat 2nd mortgages in their qualification schemes?

This first came to my attention when a relative mentioned that they were buying a house in 1994 with this strategy; since then it had become almost ubiquitous (2002) as a means of avoiding mortgage insurance.

I always thought this was a terrible cheat because any MIP savings is basically removed by the interest costs of the 2nd loan - even disregarding the additional debt to income effects.

However, I have not yet seen a clear explanation by anyone in the loan business on how (or not how) this extra debt is handled in the qualification process.

My suspicion is that it is one of those things which is overlooked as the debt assumption occurs simultaneously with taking on the main loan.

All that is required is for the lender to not ask where the down payment is coming from - a practice once employed by lenders but something which I can easily see not being done in more recent times.

[zoog]

Re: Question about 2nd mortgages

I have wondered about this myself, ever since I did the same thing in buying my house.

All that is required is for the lender to not ask where the down payment is coming from

I think that's it in a nutshell. Using a HELOC for, say, 15% of the purchase price in order to bring the total "downpayment" to 20% to avoid PMI. But you're still buying with only 5% of real equity in the house, assuming it does not increase 15% in value immediately. One of many sleight-of-hand tricks employed in this housing boom.

[c1ue]

2nd mortgage smoking gun

Here it is: (underline and bold face my add)

In 2000, Standard & Poor's made a decision about an arcane corner of the mortgage market. It said a type of mortgage that involves a "piggyback," where borrowers simultaneously take out a second loan for the down payment, was no more likely to default than a standard mortgage.

Data provided by lenders showed that loans with piggybacks performed like standard mortgages

I would be fascinated to know WHICH lenders provided this info...there is some teensy tinsy bit of conflict of interest here for any lender which sells mortgages for securitization.

By 2006, S&P was making its own study of such loans' performance. It singled out 639,981 loans made in 2002 to see if its benign assumptions had held up. They hadn't. Loans with piggybacks were 43 percent more likely to default than other loans, S&P found.

From: http://www.stltoday.com/stltoday/bus...B?OpenDocument

Also from this reference:

The subprime market has been lucrative for the credit-rating firms. Compared with their traditional business of rating corporate bonds, the firms get fees about twice as high when they rate a security backed by a pool of house loans. The task is more complicated. Moreover, through their collaboration with underwriters, the rating companies can actually influence how many such securities get created.

Moody's Investors Service took in around $3 billion from 2002 through 2006 for rating securities built from loans and other debt pools. This "structured finance" — which can involve student loans, credit card debt and other types of loans in addition to mortgages — provided 44 percent of revenue last year for parent Moody's Corp., up from 37 percent in 2002.