When we think of innovation, the first thing that usually comes to mind are the "high-tech" industries -- IT, biotech, nanotech,etc. But one of the most innovative industries in the United States is financial services. Some of those innovations are turning out to be not so good, such as collateralized debt obligations (CDOs) backed by subprime mortgages. But, in the spirit of every cloud having a silver lining, other innovations are popping up because of the credit meltdown. Take, for example, this item from a Washington Post story Home Buyers Forced to Change Tactics about a woman whose nonconforming jumbo loan fell through:
Her loan officer advised her to apply for a piggyback mortgage, meaning two loans. She made a $350,000 down payment, as planned. Then she split the remaining $600,000 between a first loan for $417,000 and a second at a higher interest rate for the balance.
The combined rate of the two, 6.875 percent, was about half a percentage point lower than the jumbo loan would have been, the mortgage company said.
Not everyone qualifies for such a loan package, as the story points out. The woman needed to put up a large down payment and had a good credit rating which allowed her to get the second mortgage at an acceptable rate.
But the story does make the point. Financial services continues to be very innovative -- even when it is part of cleaning up their own mess.
Note that the use of these "piggyback loans" is not completely new and contributed to the subprime problems (see How Rating Firms' Calls Fueled Subprime Mess - WSJ.com). However, in those cases the second mortgage was used to provide a downpayment. In this case, they are being used to create a conforming loan.