Don’t Piggyback on These Dangerous Florida Home Loans

Harj Gill has been worried for awhile. The Founder, President and CEO of American Mortgage Educators, Inc. has tried to warn buyers of the dangers presented by certain types of Florida home loans for years. And now?

“This is precisely what I have been warning the public about. It’s the first sign of the tsunami of defaults and foreclosures that are coming,” Gill cautions.

So, what’s the main area of concern for Gill? He believes piggyback mortgages - which are a combination of two Florida home loans packaged together and closed simultaneously - represent one of many non-traditional mortgages that have put homeowners at risk of losing their houses.

The problem with a piggyback Florida home loan

Let’s analyze these options: For people with little or no down payment, the amount for the first mortgage is set so it does not exceed 80% of the home’s value. This allows the borrower to avoid paying Mortgage Insurance. The remaining loan amount is then financed as a second mortgage by way of a Florida home equity loan or a Home Equity Line of Credit (HELOC), “piggybacked” onto the first.

“I have always said this is a good solution to avoid [mortgage insurance], but a terrible long term strategy,” said Gill.

An analysis by Standard & Poor’s backs up this statement. The Wall Street ratings agency looked at nearly 640,000 piggyback first-lien mortgages in bond pools. S&P discovered that first-lien mortgages connected with piggyback loans are 43% more likely to go into default than stand-alone first mortgages of comparable size. The default rate increases to a whopping 50% for borrowers with a FICO credit score of 660 or less.

Gill warns that borrowers with these loans should be extremely concerned because they’re concentrated in metropolitan areas with the greatest risk of becoming a declining housing market.

“If borrowers start to go into default in a declining property market, they will be committing financial suicide by having their credit destroyed and still being burdened with a debt well after they lose their homes,” said Gill.

Many of the largest U.S. counties in population and mortgage market size have huge portions of home loans as piggybacks, some by as much as 62%. These include California, Washington, Colorado, Virginia, Arizona, Nevada, Oregon, Illinois, Georgia, Massachusetts, North Carolina, Utah, Florida, Texas, and Missouri.

Florida home loan hikes hurt piggyback clients

The danger, according to Gill, is that unlike standard mortgages with fixed-interest rates, borrowers with adjustable rate piggybacks are not prepared for Florida home loan rate hikes that increase their payments.

What should these borrowers do? Immediately reduce interest payments and get a forecasting tool to determine the critical interest rate at which they are likely to go into default. Gill says those with HELOCs can use a little known Banking Principle to reduce their interest payments.

“Interest on your HELOC is calculated on the Daily Balance. So instead of having your income sitting in a checking account earning no interest, borrowers should ‘park’ those funds in their HELOC to immediately reduce the daily balance and thereby reduce the amount of interest they pay,” advised Gill.

Of course borrowers need to ensure they have a Florida home equity line of credit with the right features and proper setup to take advantage of this strategy. For those without a HELOC, Gill recommends refinancing the second mortgage into one with features that enables this to take place.

Otherwise, your Florida home loan future won’t be very bright.