Piggyback mortgages — those involving a first and second lien at origination — are on the rise among first-time and low- to moderate-income borrowers who face affordability challenges. This is according to a CoreLogic report published on Monday.
The share of piggybacked Federal Housing Administration (FHA) home purchase loans rose by more than seven percentage points from June 2022 to June 2024, going from 10.8% to 18%. In the same period, the piggyback share increased from 2.2% to 3.6% for conventional purchase loans backed by Fannie Mae and Freddie Mac. The calculations were based on the number of purchase loans in CoreLogic public records.
Piggybacks are a type of home equity loan taken out as a separate, additional loan from the borrower’s first mortgage. They are usually used to finance the down payment or closing costs and typically work in an 80-10-10 structure with the first mortgage covering 80% of the total cost, the piggyback covering 10% and the borrower paying the remaining 10%.
But these second liens usually have higher interest rates compared to first mortgages and likely require the payment of closing costs or origination fees.
CoreLogic data shows that homes purchased with piggybacked loans are typically much lower in value, and the borrowers for these properties are usually underwater.
In June 2024, the median property value for homes bought with a piggybacked FHA loan was $255,000, compared to $319,000 for homes with FHA loans that did not use a second lien.
The same trend is also visible in conventional loans, with piggybacked homes reaching a median purchase price of $262,000 in June 2024, compared with the median price of a non-piggybacked purchase of $410,000.
The data shows that after including the piggyback loans, FHA borrowers reached a loan-to-value (LTV) ratio of 1.022 while conventional borrowers had an LTV of 1.0, meaning they are left with zero or negative equity.
According to CoreLogic economist Yanling Mayer, “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,” Mayer said in the report.