State and local housing agencies and community organizations are leading the way to make homeownership more accessible.
Recent drops in interest rates have been good news to new homebuyers. But easing mortgage rates may come with limited relief when homeownership has become increasingly unaffordable in the face of skyrocketing home prices and soaring cost of living caused by two years of high inflation.
A recent CoreLogic blog documented a strong rise in homebuyers turning to piggyback mortgages amid the post-pandemic housing affordability crisis. Piggyback loans are smaller, second mortgages that are borrowed at the same time with the primary mortgage as much needed additional financing. They allow homebuyers with limited savings to pay for some or all of the upfront costs of buying a home: down payment, closing costs and interest rate buydowns, as well as things like property renovations.
As of August 2024, 6.7% of homebuyers who financed their home purchase with a conventional mortgage or government-insured federal FHA loan had also simultaneously taken out a piggyback mortgage. The share of piggybacked first mortgages has more doubled in the last two years.
In the FHA Lending Space, Piggyback Loans Are in High Demand
Separately, the demand for government-insured FHA loans has reached 20-year high to a level never seen, not even during the 2000s housing run-up when risky lending practices to push excessive and unsustainable household debt garnered piggyback mortgages a bad rep. At its peak in mid-2006, the share of piggybacked FHA loans reached around 10%, which pales in comparison with elevated demand seeing today. In August 2024, 21.2% of FHA purchase loans recorded a piggyback second, up from 20.1% in July and 18.1% in June.
In the Conventional Loan Lending Space, Demand Is at Two-Year High
As housing affordability worsens under record-high home prices and high inflation, the demand for piggybacked, conventional financing has also risen (Figure 1). In July and August 2024, 4.4% of conventional purchase loans recorded a concurrent piggyback second mortgage, up from 3.8% in June. Over the last two years, the share of piggybacked conventional loans has also doubled.
But the overall levels seen in the conventional loan space seem rather muted when compared with surging demand for piggybacked FHA loans . Since the burst of the 2000s housing bubble, piggyback lending in the conventional loan space has become a shadow of what it once stood. At the peak of the last housing run-up, nearly half of conventional purchase loans had a piggyback mortgage tagged on.
Piggyback Loans 2.0: Community Seconds Have Dominated the Lending Landscape
A review of lender names on mortgage deed documents reveals that today’s piggyback loans are different from those that dominated the landscape back in the bubble era of the 2000s.
Lenders of piggyback mortgages are more frequently state or local housing finance agencies (HFA), community organizations and nonprofit organizations. Hence, many borrowers and lenders may have come to know this type of financing as “community seconds,” referencing the fact that funding is sourced by local housing authorities and community organizations. Private lenders are still in the business of making credit available to those in need, but in recent years have played a lesser role. In some instances, private lenders work in partnership with local housing affordable programs, according to a MarketWatch report.
Government-sponsored agencies including Fannie Mae and Freddie Mac will back the primary mortgage that has a subordinated community second on the condition that certain eligibility requirements and underwriting standards are met. For instances, the interest rate on a community seconds loan cannot exceed the first mortgage by more than 2 percentage points. However, it is not clear how many community seconds loans are interest-free loans and how many are not. GSEs do not purchase community seconds.
For ongoing analyses of the latest mortgage origination trends, regularly check back at CoreLogic’s Office of the Chief Economist’s home page.
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