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Earlier in the year, I discussed the possibility that the excessive use of piggyback loans in recent years might have caused homeowner delinquency to be overstated:
The theory is that some homeowners are doubtless in default on both their primary mortgages and their piggybacks. Every such borrower might be served with two NODs [Notices of Default] — one for each mortgage. The number of NODs filed could thus be overstating the number of homeowners in trouble as compared to what we saw in the early 1990s, when piggyback mortgages weren’t as ubiquitous.
The conclusion at the time was that the piggyback lenders had little reason to undergo the expense of filing a default notice:
By now, in other words, issuers of piggyback mortgages may have realized that there is little chance of recovering any losses and stopped bothering to initiate foreclosure proceedings. If this is the case, then the period of double counting has already come and gone.
This was just a guess, as I stated at the time, but I’ve recently come across some data that allowed me to put our conclusion to the test.
The data in question was a Microsoft Excel file of all the NODs issued during the first week of August in California. For those interested, I will describe the steps I took to analyze the data — feel free to skip to the next paragraph if you just want the conclusion. First, I threw out any properties that had missing or obviously erroneous data for either the defaulted loan amount or the property sale price. Then, to get rid of potential distortions caused by the huge bubble-era surge in housing prices, I got rid of any properties whose sale date was recorded before 2004. Finally, I divided each property’s defaulted loan amount by its sale price. Under the assumption that a piggyback loan would by definition not be made for more than half of a property’s value, I tallied up the number of defaults with a loan amount of less than 50 percent of the home’s sale price.
Of the 1,037 defaulted loans remaining after cleaning up the data, only 8 had a value of less than half of their respective homes’ sale prices. In other words, piggyback loans seem to have accounted for fewer than .8 percent of all NODs filed on that particular week. At a time when mortgage defaults are piling up at a monthly rate that is about 60 percent higher than during the bulk of the 1990s downturn, a potential error of .8 percent is analytically insignificant. The double-counting of defaults appears to be a non-issue.
— RICH TOSCANO