Mortgage practice hindering recovery

Piggyback loans pose big problem for housing sector

Lisa Wright is among the nearly 40 percent of Massachusetts home buyers who bought houses in 2005 with two separate loans, according to new data released by the Federal Reserve Bank of Boston.

Three years later, the practice has virtually stopped. But Wright and others who signed two mortgage notes to finance high-priced homes at the height of the housing market now find themselves facing problems as they seek to reduce payments and avoid foreclosure. Because two lenders often are involved, making any changes in such loans is especially complicated - for banks and borrowers.

So-called piggyback loans are "one of biggest reasons for the last 14 months why the voluntary [loan] modifications haven't worked," said Kathleen Day, spokeswoman for the Center for Responsible Lending. About 30 percent of Massachusetts home buyers between 2004 and 2007 bought properties with two mortgages to avoid paying a down payment or private mortgage insurance, data from the Federal Reserve Bank of Boston show. Nationwide, about 40 percent of home purchases in 2006 involved piggyback loans, according to a 2007 Credit Suisse report.

Housing specialists say resolving issues between competing lenders on the same properties is crucial to ending the nation's housing crisis. In many cases, first mortgage holders have no incentive to reduce loan payments for a borrower to make payments on a second mortgage with another lender, according to the National Association of Consumer Bankruptcy Attorneys. At the same time, holders of second mortgages have little reason to support loan modifications for borrowers that could cause them significant losses, the association said.

Lenders acknowledge there is a problem.

"Too many parties are involved sometimes with different interests," said Faith Schwartz, executive director of Hope Now, an alliance of lenders and servicers and other mortgage market participants. "It is a troubling issue that we are very focused on how we can get better at."

The problem is exacerbated because many borrowers with two mortgages already are drowning in debt, said Tom Deutsch, deputy executive director of the American Securitization Forum, a New York-based group representing participants involved in the process of creating securities.

"Borrowers with second liens have a much higher tendency of being overextended on their ability to make payments," Deutsch said.

In addition, many people who financed the entire price of a house are finding their property is now worth less than what they owe, commonly known as being underwater. About 100,000 Massachusetts homeowners - 10 percent of those with mortgages - find themselves in that situation, according to another study from the Federal Reserve.

But some housing specialists have found ways to get around the problems associated with refinancing second mortgages. Bruce Marks, chief executive of the Jamaica Plain-based Neighborhood Assistance Corporation of America, advises borrowers to focus on their first loans if possible and worry about second loans later.

"They can't do anything," Marks said of secondary lenders. "They'll harass you. They'll call you, they'll send you nasty letters. I think we can deal with that."

Other possible solutions include providing incentives to secondary lenders to write off their loans, or urge the Treasury Department to buy up lower-cost second mortgages and work with borrowers. Another option is a federal bankruptcy provision, under consideration in Congress, that would allow judges to write off second liens in court, which could make secondary lien holders more flexible.

Wright has been in a stalemate with her second lien holder since August.

The single mother bought her Methuen house in 2005 with 100 percent financing - a first loan with an adjustable rate and a separate home equity loan with a fixed 10 percent interest rate.

She said her mortgage broker convinced her she could refinance later, but when Wright attempted to do so her home value had plunged - it no longer was worth what she paid for it.

Wright later decided her only option was a short sale, in which lenders approve the sale of the home at a loss. Her first mortgage holder agreed. But the second servicer, she said, required her to pay back the $67,000 home equity loan even after the sale. She's been anxiously waiting to see if the second lien holder will accept a $2,500 payment to let go of the lien. Otherwise, she said, the house will go into foreclosure and the second lien holder will get nothing.

"They want me to pay the payments for a house I don't have," said Wright, who moved out and now rents a condominium. "If I foreclose, it is a lose-lose situation for everybody."

Jenifer McKim can be reached at jmckim@globe.com.