Demand for 2nd Mortgages Could Go Down(January 10, 2006) --
Second mortgages could fall out of favor with first-time and moderate-income home buyers looking to get into a more expensive home should loan costs continue to rise.
In recent years, more borrowers have relied on second mortgages to avoid the higher cost of mortgage insurance for those unable to contribute a 20 percent down payment; but the Federal Reserve has raised short-term interest rates 13 times since June 2004, which has increased the cost of these so-called piggyback loans.
Moreover, the Fed has expressed concern over the growth of second mortgages, warning that the increase in debt taken on by consumers could ultimately lead to a surge in foreclosures.
Edwin Groshans, an analyst with Fox-Pitt, Kelton, a brokerage that specializes in financial institutions, believes that home buyers will continue to turn to second mortgages unless the federal funds rate is increased by another 1.75 percentage points, which then would make the average piggyback loan more expensive than mortgage insurance.
Source: News & Observer (01/10/06); Norton, Frank
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