More Motivated Sellers, After All

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Earlier in the year, I discussed the possibility that the excessive use of piggyback loans in recent years might have caused homeowner delinquency to be overstated:

The theory is that some homeowners are doubtless in default on both their primary mortgages and their piggybacks. Every such borrower might be served with two NODs [Notices of Default] -- one for each mortgage. The number of NODs filed could thus be overstating the number of homeowners in trouble as compared to what we saw in the early 1990s, when piggyback mortgages weren't as ubiquitous.

The conclusion at the time was that the piggyback lenders had little reason to undergo the expense of filing a default notice:

By now, in other words, issuers of piggyback mortgages may have realized that there is little chance of recovering any losses and stopped bothering to initiate foreclosure proceedings. If this is the case, then the period of double counting has already come and gone.

Of the 1,037 defaulted loans remaining after cleaning up the data, only 8 had a value of less than half of their respective homes' sale prices. In other words, piggyback loans seem to have accounted for fewer than .8 percent of all NODs filed on that particular week. At a time when mortgage defaults are piling up at a monthly rate that is about 60 percent higher than during the bulk of the 1990s downturn, a potential error of .8 percent is analytically insignificant. The double-counting of defaults appears to be a non-issue.

-- RICH TOSCANO