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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
piggyback mortgage. The lender offered a first mortgage for perhaps of the
home’s value and a second mortgage for another or even . Borrowers liked
these because their monthly payments were often cheaper than a traditional mort-
gage plus the required mortgage insurance, and the interest payments were tax de-
ductible. Lenders liked them because the smaller first mortgage—even without
mortgage insurance—could potentially be sold to the GSEs.
At the same time, the piggybacks added risks. A borrower with a higher com-
bined LTV had less equity in the home. In a rising market, should payments become
unmanageable, the borrower could always sell the home and come out ahead. How-
ever, should the payments become unmanageable in a falling market, the borrower
might owe more than the home was worth. Piggyback loans—which often required
nothing down—guaranteed that many borrowers would end up with negative equity
if house prices fell, especially if the appraisal had overstated the initial value.
But piggyback lending helped address a significant challenge for companies like
New Century, which were big players in the market for mortgages. Meeting investor
demand required finding new borrowers, and homebuyers without down payments
were a relatively untapped source. Yet among borrowers with mortgages originated
in , by September those with piggybacks were four times as likely as other
mortgage holders to be or more days delinquent. When senior management at
New Century heard these numbers, the head of the Secondary Marketing Depart-
ment asked for “thoughts on what to do with this . . . pretty compelling” information.
Nonetheless, New Century increased mortgages with piggybacks to of loan pro-
duction by the end of , up from only in . They were not alone. Across
securitized subprime mortgages, the average combined LTV rose from to
between and .
Another way to get people into mortgages—and quickly—was to require less in-
formation of the borrower. “Stated income” or “low-documentation” (or sometimes
“no-documentation”) loans had emerged years earlier for people with fluctuating or
hard-to-verify incomes, such as the self-employed, or to serve longtime customers
with strong credit. Or lenders might waive information requirements if the loan
looked safe in other respects. “If I’m making a , , loan-to-value, I’m not
going to get all of the documentation,” Sandler of Golden West told the FCIC. The
process was too cumbersome and unnecessary. He already had a good idea how
much money teachers, accountants, and engineers made—and if he didn’t, he could
easily find out. All he needed was to verify that his borrowers worked where they said
they did. If he guessed wrong, the loan-to-value ratio still protected his investment.
Around , however, low- and no-documentation loans took on an entirely dif-
ferent character. Nonprime lenders now boasted they could offer borrowers the con-
venience of quicker decisions and not having to provide tons of paperwork. In
return, they charged a higher interest rate. The idea caught on: from to ,
low- and no-doc loans skyrocketed from less than to roughly of all outstand-
ing loans. Among Alt-A securitizations, of loans issued in had limited or
no documentation. As William Black, a former banking regulator, testified before
the FCIC, the mortgage industry’s own fraud specialists described stated income
