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'Piggyback' Loans Allowed by Freddie Fed Mortgage Risks

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moh malekpour

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'Piggyback' Loans Allowed by Freddie Fed Mortgage Risks
For a glimpse of the risks that infected the mortgage business in recent years, consider a small slice of what happened at Freddie Mac, the giant home-loan investor chartered by the government to bring stability to the housing market.

Before the era of easy credit, home buyers were ordinarily required to come up with down payments, which gave them an equity stake in their property

That equity reduces the danger of foreclosure, and federal law prohibits Freddie Mac from buying mortgages that cover more than 80 percent of a home's value -- unless the loan comes with a safety net, such as an insurance policy that would kick in if the borrower defaults
However, in recent years, Freddie Mac permitted home buyers to borrow all or part of the remaining 20 percent by using second loans, called "piggyback" loans, with no safety net.

As early as 2005, an industry group protested that the practice was designed to get around the law and should be stopped.

Regulators allowed it to continue, and Freddie Mac's financial disclosures were silent on the subject until last month, when the company noted that such arrangements could leave borrowers more susceptible to foreclosure.

"[A]s home prices increased during 2006 and prior years, many borrowers used second liens . . . thus avoiding requirements under our charter," Freddie Mac said in a quarterly financial report.
 

Randolph Kinney

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Regulators allowed it to continue, and Freddie Mac's financial disclosures were silent on the subject until last month, when the company noted that such arrangements could leave borrowers more susceptible to foreclosure.
If you are not believing in a conspiracy, then this statement should have no impact. Everyone acknowledges what was going on and that the risks violated regulation and policy.

How bad is it?
 

Dee Dee

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A little off topic, but will someone please set me straight me if this information is incorrect?

I read somewhere that it's impossible to track exactly how many homeowners, including "prime" borrowers, have taken out second mortgages and home equity credit lines and in what amounts because they are usually not from their primary lender. As a result, based on any reporting from the first mortgage lenders, we really don't know how much home equity is still remaining in America's homes. In other words, just because someone qualified for a prime fixed-rate loan with a reasonable downpayment doesn't mean that they haven't managed to tap every last penny out.

If that's true, then that fact is not being reported or factored into what might happen to those loans and borrowers if values continue to decline.

Any input appreciated!
 

Doug Meyer

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Sep 13, 2003
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Indiana
For a glimpse of the risks that infected the mortgage business in recent years, consider a small slice of what happened at Freddie Mac, the giant home-loan investor chartered by the government to bring stability to the housing market.

Before the era of easy credit, home buyers were ordinarily required to come up with down payments, which gave them an equity stake in their property

That equity reduces the danger of foreclosure, and federal law prohibits Freddie Mac from buying mortgages that cover more than 80 percent of a home's value -- unless the loan comes with a safety net, such as an insurance policy that would kick in if the borrower defaults
However, in recent years, Freddie Mac permitted home buyers to borrow all or part of the remaining 20 percent by using second loans, called "piggyback" loans, with no safety net.

As early as 2005, an industry group protested that the practice was designed to get around the law and should be stopped.

Regulators allowed it to continue, and Freddie Mac's financial disclosures were silent on the subject until last month, when the company noted that such arrangements could leave borrowers more susceptible to foreclosure.

"[A]s home prices increased during 2006 and prior years, many borrowers used second liens . . . thus avoiding requirements under our charter," Freddie Mac said in a quarterly financial report.


Well DUH! That was hard to figure out
 

Randolph Kinney

Elite Member
Joined
Apr 7, 2005
Professional Status
Retired Appraiser
State
North Carolina
A little off topic, but will someone please set me straight me if this information is incorrect?

I read somewhere that it's impossible to track exactly how many homeowners, including "prime" borrowers, have taken out second mortgages and home equity credit lines and in what amounts because they are usually not from their primary lender. As a result, based on any reporting from the first mortgage lenders, we really don't know how much home equity is still remaining in America's homes. In other words, just because someone qualified for a prime fixed-rate loan with a reasonable downpayment doesn't mean that they haven't managed to tap every last penny out.

If that's true, then that fact is not being reported or factored into what might happen to those loans and borrowers if values continue to decline.

Any input appreciated!
I don't have the statistics but I have read that second mortgages are defaulting at record rates. That includes prime, home equity loans. Many of these home equity loans were made on 3/1, 5/1, 7/1 and 10/1 hybrid interest-only ARMS.
 

Mark K

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Jan 27, 2004
Professional Status
Certified Residential Appraiser
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Indiana
A little off topic, but will someone please set me straight me if this information is incorrect?

I read somewhere that it's impossible to track exactly how many homeowners, including "prime" borrowers, have taken out second mortgages and home equity credit lines and in what amounts because they are usually not from their primary lender. As a result, based on any reporting from the first mortgage lenders, we really don't know how much home equity is still remaining in America's homes. In other words, just because someone qualified for a prime fixed-rate loan with a reasonable downpayment doesn't mean that they haven't managed to tap every last penny out.

If that's true, then that fact is not being reported or factored into what might happen to those loans and borrowers if values continue to decline.

Any input appreciated!

Last figure I read said over 16% of second mortgages/heloc's were deliquent. That is about the same deliquency rate as the sub-prime mortgages.

Also, talking to several experienced RE brokers in the area, they say NOBODY brings cash to closings anymore. Even the upper end buyers ($400K+ in this area with about $165K avg.) virtually all get 80/20 loans. 80% first mtg., 20% second mtg./heloc. One long time agent said yesterday that he hadn't seen anyone bring cash to closing in the past couple years (except some sellers). He walks out of most listing presentations telling the HO that he can't help them since most of them owe more than the house is worth, between the first and second mtgs.


None of this is news to anyone in this area. We've been melting down for about 4-5 years or more. Its only become a "problem" since it started affecting the east and west coasts. When real estate values stagnate or drop in L.A. or FLA, it a crisis. In flyover country, it barely makes the local paper. Foreclosures have been a big part of the market for a long time in the midwest.
 

Dee Dee

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Jan 16, 2002
Professional Status
Certified Residential Appraiser
State
Colorado

Dee Dee

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
And another.

Freddie Sees $5.5B-$7.5B More Losses

http://biz.yahoo.com/ap/071211/freddie_mac_mortgages.html

WASHINGTON (AP) -- The chief executive of Freddie Mac estimated Tuesday the mortgage finance company will lose an additional $5.5 billion to $7.5 billion over the next few years as the housing crisis worsens and home-loan defaults rise.

"I honestly think it's going to get tougher before it gets better," Richard Syron, the company's chairman and CEO, said in a discussion with financial analysts in New York.
Freddie's shares fell $2.09, or 6 percent, to $32.95 in morning trading.
 

Karl

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Jan 15, 2002
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Licensed Appraiser
State
Arizona
Damn is this identical to what the Black Helicopter pilots were saying 5 years ago I want RESTITUTION for my pilots!! Thease superstars that have now figured it out got paid astronomical for screwing up. I demand restitution.
 
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