Piggyback Lending, Article Critique Example

Introduction

Financial crisis started in the year 2006 and house prices started to depreciate while mortgages experienced an increase in montages defaults. Various factors led to an increase in mortgage defaults and rates in foreclosure. A Change in the economy and unreasonable expectation are factors that contributed to rise in mortgage defaults. Piggyback is one of the lending’s that grew tremendously during the current house boom. Rising of piggyback lending is one of the reasons that contributed to the increase in mortgage defaults and rates in foreclosure.

Piggyback lending facilitates houses hold to acquire huge debts through the buying of inflated assets and this further inflates housing bubble (laCour-Little, Calhoun, and Yu 1). Piggyback loans have clearly explained the extent of negative equity. Piggy loan process is very complicated because lien and junior lien loans are arranged and disposed in different selection securitization. In addition, if junior lien lender differs from the first lien lenders then it has little enticement in changing the loan to avoid foreclosure especially in a case where there is no equity.

Conclusion

Research has proven that a borrower’s post origination borrowing weakens their equity thus raising the risk of default on the higher debt. The pattern of a borrower in connection to home equity line measures the credit worthy of a borrower (laCour-Little, Calhoun, and Yu, Pp 2). This will reveal the performance in connection to home equity line and their loans hence finding the difference in prepayment risk. It is proven that home equity borrowing is associated with the falling rates of the year 2006 to 2008. Unfortunately, there is no information of the first lending loan since different people give the first lender and junior debt. Piggyback loans transactions have risks throughout the system therefore bringing risks in the entire mortgage system.

 Work Cited

La Cour-Little, Michael, Calhoun, Charles and Yu Wei. What role did piggyback lending play in the housing bubble and mortgage collapse? 2011.