by Calculated Risk on 7/10/2006 12:38:00 PM

From the LA Times: Default rate of 'piggyback' loans spurs Wall Street to action

Wall Street is sounding the alarm on one of the most popular ways to buy a house in many high-cost areas around the country — so-called "piggyback" programs that mesh first mortgages with second-lien credit lines or mortgages.

As of July 1, the most influential ratings agency in the mortgage arena, Standard & Poor's Corp., has upped the ante for lenders who fund piggyback deals. The move is likely to raise interest rates and fees for some home purchasers this summer, say mortgage experts, and could reduce the volume and availability of piggyback programs overall.

The reason for the change, according to Standard & Poor's credit analyst Kyle Beauchamp, is that an exhaustive study of piggyback loans found them anywhere from 43% to 50% more likely to go into default than comparable stand-alone first-lien purchase transactions.

And a mention of the new nontraditional mortgage guidance:

More ominous still for the piggyback market: Federal financial regulators are expected to issue guidelines for lenders within the next few months that will force them to throttle back on piggybacks, payment-option loans and interest-only loans to borrowers with marginal credit scores and incomes.

The regulatory agencies will eventually close the barn door; too bad the cow is long gone. I'm surprisd it has taken so long for the rating agencies (like S&P) to catch on.