Collateral mortgages (i.e., mortgages that involve a first and second lien at the time of origination) are on the rise among first-time and low- and moderate-income borrowers facing affordability challenges. This is based on a core logic The report was released Monday.
piggyback share federal housing administration From June 2022 to June 2024, Federal Housing Administration (FHA) home purchase loans increased by more than seven percentage points, from 10.8% to 18%. Over the same period, the share of carry backed by conventional purchase loans increased from 2.2% to 3.6% Fannie Mae and Freddie Mac. This calculation is based on the number of purchase loans in CoreLogic public records.
A collateral loan is a type of home equity loan that is offered as a separate additional loan to a borrower’s first mortgage. They are typically used to cover a down payment or closing costs, often in an 80-10-10 structure, where the first mortgage covers 80% of the total cost, the collateral loan covers 10%, and the borrower pays the remaining 10%.
But these second liens typically have higher interest rates than first mortgages and may require closing costs or origination fees.
CoreLogic data shows that homes purchased with collateral loans are often worth much less and the borrowers of these properties are often in distress.
In June 2024, the median property value of a home purchased with an FHA loan was $255,000, while the median property value of a home purchased with an FHA loan without a second lien was $319,000.
The same trend is evident among conventional loans, with the median purchase price of a home with an attachment reaching $262,000 in June 2024, compared to $410,000 for a home without an attachment.
The data shows that after factoring in collateral loans, FHA borrowers have a loan-to-value (LTV) ratio of 1.022, while conventional borrowers have an LTV of 1.0, meaning they have zero or negative equity.
“The overall performance of these overleveraged loans will depend heavily on the resilience of the U.S. economy and the strength of the job market,” CoreLogic economist Yanling Mayer said.
“However, despite widespread expectations that home prices will continue to rise, the U.S. economy will remain strong and inflation continues to fall – not to mention the much-anticipated September Fed Policy rate cuts – nevertheless, it will be worth watching the performance of these highly leveraged loans closely in the coming months,” Mayer said in the note.
