For the first time in a while, second liens have come to the forefront of mortgage industry conversation. To a large degree, this is natural because of the unprecedented rise in home prices that we have experienced since the Covid shock. These seconds can be so-called “piggyback” loans that are used to keep the first lien under the conforming loan limit at origination, or they may be “closed seconds” that are used by consumers to extract equity from gains in home price valuations. This product may be superior to the other traditional form of equity extraction, cash-out refinancings, as this vehicle requires that the entirety of the original mortgage be refinanced, not just the extraction amount, often from a much lower level. Finally, while not strictly a loan, Home Equity Lines of Credit (HELOCs) are also popular for this purpose.
Below find the share of second liens, by both loan count and by the original loan amount from HMDA[1]: A little while ago, we wrote about DPAs and noted that there are distinct differences in how these are reported between the GSEs and FHA[1]. Subsequently, we looked into the issuers of these FHA DPA loans and noted that DPA usage has been broadening to include a growing set of lenders in recent years[2].
We now turn to the GSEs. We noted in our earlier reports that while there is no DPA flag for the Enterprises, we can derive some information about their use from the fact that DPAs are only allowed through their specified second lien programs. This leads us naturally to broaden our investigation to consider those cases where new loans are delivered in tandem: a first or primary mortgage along with a second lien or “piggyback” mortgage. The Enterprises refer to these as “secondary” mortgages. The question of course is do we have the information necessary to assess the scope and performance of loans with accompanying seconds? Given that the GSEs disclose the CLTV as well as the OLTV of a loan, if the former is higher than the latter, we can consider it as a piggybacked loan. Grist for the Recursion mill. To start, we limit ourselves to purchase loans, and we look at the share of deliveries with accompanying second liens by agency: With home prices at record high levels and mortgage rates at their record highs since the turn of this century, it’s natural to ask if the housing market will be the source of new systemic risk. Over the past year, we have written extensively about “mortgage winter”, a condition where housing demand is held back because of affordability, while at the same time, supply is constrained by current homeowners who are locked into properties by mortgages with rates far below those available in the prevailing market. This is what economists would call a “bad equilibrium”, a state of great strains in the market that tends to persist.
While the housing finance industry is under great duress, the spillover to the broader economy remains limited, as for example, the labor market has held up well despite soaring borrowing costs. Within housing, the notable good economic news is that the extraordinary surge in house prices in the wake of the Covid-19 pandemic has resulted in an astounding 50% surge in the value of homeowner’s equity in real estate since Q1 2020 to over $30 trillion. |
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