From “Second Mortgage” to “Rare Mortgage”
Why have second mortgages gone from “standard” to “rare” over the last 12 months? It is not about function, but about who is buying these products after the loan closes.
To simplify, Second Mortgages generally arose to avoid Mortgage Insurance. Mortgage Insurance (MI) was required for most loans in which the loan amount surpassed 80% of the appraised value of the property. Instead of having a loan at 90% of the appraised value combined with MI, you could have your 1st mortgage at 80% and a 2nd mortgage representing 10% with no MI. This was all seemless because the secondary market, made up of those that buy loans, supported it. Lenders closing these loans had places to sell them (large lenders and banks sometimes kept them in their own portfolios).
The landscape of buying second mortgages has changed dramatically. There is no consistent buyer of these loans. High delinquency rates, low recovery rates in the event of default and a lack of buyers means that lenders keep these loans in their own portfolio (from their own funds). Now 2nd Mortgages are used almost exclusively to reach advantageous levels on the first. An example would involve having a 1st mortgage at 729,750 with a small 2nd to avoid the “jumbo” classification or keeping the 1st at 417,000 with a small second to achieve the best rate on the 1st.
The result is the return of Mortgage Insurance on loans that exceed 80% of the appraised value. The downside is that Mortgage Insurance Companies are under financial duress and are tightening some lending guidelines beyond what would be accepted by those that typically create them (Fannie Mae and Freddie Mac). I will cover some of this tightening in another article to follow.
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