First-time and low-to-moderate income homebuyers are disproportionately impacted and over-leveraged
Two years of high inflation, staggeringly high home prices, and cripplingly high interest rates are driving a growing number of homebuyers to take out costly second mortgages. This is especially true for those homebuyers who can least afford a home.
What Is a Piggyback Loan?
A piggyback loan is a separate and secondary loan that homebuyers borrow in addition to the first, main mortgage on the house. A type of small home equity loans or home equity lines of credit (HELOCs), they are often used by cash-strapping homebuyers in order to obtain down payment financing or help cover closing costs. In the case of piggybacked conventional loans, they are often known as “80-10-10” loans, where borrowers combine a 10% cash down payment with a 10% piggyback loan.
Benefits notwithstanding, this type of secondary financing is not without drawbacks. They tend to be high-cost loans that carry higher interest rates than a primary mortgage. In addition, borrowers will likely pay separate closing costs or origination fees on these loans.
Homebuyers Increasingly Turn to Piggyback Financing
Figure 1 breaks piggybacked home purchases out between FHA lending and conventional financing to gauge how the housing affordability crisis has disproportionately impacted first-time homebuyers (FTHBs) and those who are least able to afford a home.
After mortgage rate began to rise dramatically in mid-2022, more homebuyers who are dependent on FHA loans have sought the help of additional piggyback financing. FHA loans are popular with FTHBs and low-to-moderate income families who often are unable to meet the conventional down payment requirements and lack the necessary credit history to qualify for conventional loans.
The shares of piggybacked home purchases are historically higher for FHA borrowers. As of 2017, piggybacked FHA purchases accounted for 9.8% of the FHA purchase-loan volume. In contrast, 3.8% of conventional purchase loans had a piggybacked second loan. At the end of 2019, the share of piggybacked FHA purchases was 13.8%, while the share of piggybacked conventional purchases was 3.2%.
Between June 2022 and June 2024, the share of piggybacked FHA purchase loans rose by more than 7 percentage points, from 10.8% to 18%. The soaring cost of homebuying has also sent more conventional borrowers to take out piggyback loans, with the percentage of piggybacked loans in this group rising from 2.2% in June 2022 to 3.6% as of June 2024.
Piggybacked Purchases Are Increasingly Seen for Lower-Value Homes
Property values for homes purchased with piggybacked loans also corroborate the observation that housing affordability woes have disproportionately impacted low-to-moderate income homebuyers who have been financially burdened under high inflation and the high cost of living.
As shown below in Figure 2, homes purchased with secondary piggyback loans are typically much lower in value. Furthermore, the gap in price affordability between the homes of those who sought a second mortgage and those did not has also widened considerably over the last two years.
Looking at the end of 2017, median property value among homes bought with a piggybacked FHA loans was $34,600, or 17% cheaper than those without ($168,600 versus $203,200). In June 2022, they were $55,000 or 19% cheaper ($237,800 versus $292,800); two years later in June 2024, the gap widened further to $64,000 ($255,000 versus $319,000).
There is a similar relationship when comparing homes bought using the conventional financing. In June 2022, piggybacked homes had a median purchase price of $265,000, which was $135,000 or 33% cheaper than the median price of non-piggybacked purchases. In June 2024, the gap widened to 36%, with piggybacked homes reaching a median purchase price of $262,000 compared with the median price of a non-piggybacked purchase of $410,000.
Piggybacked Home Purchases Have Zero to Negative Equity
A further review of the loan-to-value (LTV) ratios of piggybacked home purchases shows that homebuyers with these properties are over-leveraged.
As shown in Figure 3, median origination loan-to-value ratio among piggybacked FHA loans is 98.19, and that is before taking into consideration the amount of money borrowed with a piggyback loan. With conventional loans, median origination LTV has ranged from 80 to above 90. Over the last 12 months, the LTV on conventional loans has consistently been above 90, and the ratio reached 94.5 in June 2024.
After including the amount borrowed with piggyback loans, homeowners are often left with zero or even negative equity. The combined LTV, or CLTV, reached 1.022 for FHA borrowers and 1.0 for conventional loan borrowers. With little or zero equity on the home, many borrowers are at a greater risk of nonpayment and default should there be an unexpected, adverse impact from employment or family finances.
The overall performance of these over-leveraged loans will largely depend on the resilience of the U.S. economy and the strength of the job market. However, despite wide expectations that home prices will continue to rise, and that the U.S. economy will remain robust while inflation continues to fall — not to mention a much-anticipated September Federal Reserve policy rate cut — it is nevertheless worth keeping a close eye on the performance of these highly leveraged loans in the coming months.
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