We examine the use of simultaneous close junior lien lending over the course of the recent housing bubble and subsequent mortgage market collapse. Using both state-level and Zip code-level data over the period 2001-2008, we find that the fraction of piggyback originations is related to higher foreclosure and default rates in subsequent years. This pattern, however, appears to be limited to the use subprime piggybacks, rather than a more general phenomenon. In addition, in subsequent versions of this paper, we will explore difficult issues of causality: did piggyback lending drive up house prices (the collapse of which then triggered higher foreclosure rates) or did accelerating house prices drive an increase in piggyback lending?
The rise of piggyback lending during 2000 to 2006 may also have contributed to the rise in default and foreclosure rates. Some have argued that piggyback lending enables households to take on too much debt via the purchase of inflated assets (WSJ, 2009), and therefore helped to further inflate the housing bubble. Once the bubble burst, it makes highly leveraged households at greater risk of negative equity and more vulnerable to default.
Different Types of Piggyback Originations and Mortgage Performance
Last but not least, we examine whether different types of piggyback lending have different impact on foreclosure rates. We distinguish between three types of piggyback lending: first-lien prime and second-lien prime, first-lien prime and second-lien subprime, and first-lien subprime and second-lien subprime.
