Foreclosures: Blame It on Second Mortgages

by Steve Crossland, REALTOR in Austin TX on December 12, 2006 · 7 comments

I thought this was interesting. Again, people are over-borrowing against real estate and getting into trouble. At our sales meeting this morning a Mortgage person updated us on a few things and then wanted to make sure we knew that they can do so-called 80/20 loans (80% first mortgage, 20% second mortgage = 100% loan) so our buyers can buy property with zero down and no PMI. I have to bite my lip. I want to shout out “quit giving people loans who can’t afford to pay a downpayment to buy real estate!”

The article below backs me up. Unless used purly as a leveraging strategy by investors who know what they are doing (and have the cash on hand to buy out if needed), I can’t think of a good reason for anyone to borrow 100% when purchasing a home, thereby becoming upside down on the mortgage payoff vs. attainable sales proceeds from day one.

From the Wall Street Journal:

Mortgage lenders are tightening their underwriting standards as more homeownership ends in foreclosure, but a new study suggests that the popularity of second mortgages could undermine their efforts.

New data in a research report from securities firm UBS shows that nearly half of all loans delinquent for more than 90 days this year also have second mortgages, while 30 percent of loans that are current have them, according to the UBS report.

“Mortgages that have a second mortgage behind them run a far higher risk of default,” says Zach Gast, a financial analyst in Rockville, Md., for the Center for Financial Research and Analysis, an independent research group. Gast says borrowers’ debt-to-income levels are similar for all mortgages, regardless of whether payments are late or current, suggesting the second mortgages are pushing borrowers into delinquency or default.

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