Categories
Economics

Piggyback Lending

Introduction

This review analyzes the article ‘What role did piggyback lending play in the housing bubble and mortgage collapse? By Michael LaCour-Little, Charles A. Calhoun, Wei Yu in the Journal of Housing Economics (2011).

In this paper, I have summarized the article and defined the purpose of the article, as well. In the review section, I have examined the structural foundations of the said article by focusing on its degree of conciseness and presentation of information. I have criticized the article based on stability, objectivity, relevance, currency, accuracy authority. The assessment is also based on analyzing graphs prior to concluding on its credibility and accessibility. Generally, this article is extremely relevant, clear and well written.

Summary of the article

This article seeks to present the adverse impacts of piggy back lending. In this article, various factors led to the increase in mortgage defaults and rates relating to the crisis in the housing market. One of the factors that the authors associate with this crisis is the piggyback lending system, which they claim records the highest rates of foreclosures and defaults. They also explain that these default and foreclosure rates increase with the increase in magnitude of the cost of the piggyback loans. The authors venture into an analysis, in which they come up with quintiles of states, used to draw conclusions regarding the role played by the piggyback lending system as far as the housing bubble and mortgage collapse is concerned.

Structure of the article

The author of this article has introduced it with an abstract providing an overall view of the article. This has been effective in providing the overall overview because the major points and the main themes have been established. This is a two paged article based on empirical foundations. Although the article is lengthy, the information is a lot to absorb. The author has arranged the points in a logical sequence and used lengthy sentences, paragraphs and headings. This makes it difficult to access, read and understand the information. There is a coherent flow of ideas, which takes the reader systematically into insight of what the authors are trying to explain.

They language and terminology used reveals the authors’ economic background, achieving the double purpose of enhancing the credibility of the journal article. Furthermore, the conclusion is not a summary of the points made but a question defining the overall theme of the article. The remarkable structure of the outline presented by the authors is sufficient to drive the point home so that the reader is able to capture the concept.

Authority

Housing Economies is an official journal, whereby this article has been featured is a reputable source. In this journal, the author seeks to educate and inform the reader, who is the financial community.

Accuracy

The author has obtained much of the information from the original piece of the journal. The overall article is based on more than 30 sources the original, co-authored by Michael LaCour-Little, Charles A. Calhoun, Wei Yu. The article’s accuracy is also confirmed by the careful scrutiny that it was subjected to by the journal. The fact that the article is peer reviewed also verifies its precision.

Currency

The medicine journal, which published this article, was published 20 February 2011 and the article was published in April 2010. It is based on sources dating from 1997 to 2008. Because the references are recent and the fact that the article was recently published, this is a strong indication that this article is current. Similarly, the information in the this article is based on current developments in piggy back lending.

Relevance

The author if this article targets to inform and educate the economic community through the economics journal. This indicates that this article is highly relevance to the target audience. In addition, the article has focused on a topic, which is of great relevance to the current society. It serves to relate the present economic status and preceding happenings, which may have contributed to them. Such an analysis is significant when it comes to the forecasting of future prospects in the same line. This article serves as an ideological platform for future research in the field of economics, and more particularly, the place of piggyback lending in the present world of economics.

Objectivity:

The author of this article has sourced content from a wide range of experiences by different authors in the economics sector associated with formulas and graphs. This article has presented research opinions, facts and decisions. Because this article has concentrated on the negative implications of piggyback lending, it does lead to the downfall of the housing market.

Stability

This article was published in a popular housing economics journal; it is available to the public through reliable and credible academic databases. This implies that this is a stable source of information that can be accessed by the public. Other researchers and scholars have also used the article, and the positive reviews from many of them are adequate to point to the fact that the article pops out of a stable analytical and professional background.

Analysis of graphs

Graphs

The graphs below were used to analyze the proportions of the various kinds of piggyback lending that exist.

This first graph is a representation of the proportion of total piggy lendings in the period between the year 2001 and 2008 (LaCour-Little, Calhoun and Yu 85). It is evident from the graph that the proportion was relatively low in 2001. The value for the avery measure was 5.21% while that of the calhoun measure was 8.95%. This later on underwent a steady increase until its peak in 2006, after which it sharply went down to the least ever value in 2008.  At this time the Avery measure was 2.34% while the Calhoun measure was 3.54%.

This graph shows the proportion of first lien prime second lien prime piggybacks in the period between the year 2001 and 2008. The value for the avery measure was 6.08% while that of the calhoun measure was 9.11% (LaCour-Little, Calhoun and Yu 85).  As was the case with the total piggybacks, the values underwent a steady increase and peaked in the year 2006, after which it they began dropping till their least values in 2008.  At this time the Avery measure was 2.02% while the Calhoun measure was 3.09%.

The first lien prime second lien subprime piggybacks graph, as oppossed to the others began in 2004 with the peak of the proportion measures. At this time, the calhouse measure stood at 3.52% while the avery measure was 3.33%. The progress was not a steasy one as the values dropped in 2005 before going up in 2006. As was in the previous cases, 2006 marked the starting point of the downward trend which ended in 2008, recording 0.36% for the calhoun measure and 0.26% for the avery measure.

The calhouse and avery measures had a similar behaviour for the first lien subprime second lien subprime piggybacks, and they differed by very small values. In 2004, the calhouse measure was 1.89% while the avery measure was 1.87%. The values shot steadily to a peak, which was slightly sustained between the years 2005 and 2006. It was thereafter that they began a downward trend which ends at 2008 when both record the lowest ever values of 0.03%.

The next set of graphs were used to represent the relationship between the state foreclosure rates and the lagged piggyback originations in form of percentage. The first consideration is is for all states while the subsequent ones give a representation of the five different quintiles, considering the period between the year 2001 and 2008. In the states where foreclosure procedures were non-judicial in nature, a 2 year lag was used, while a 3 year lag was adopted in those that had judicial procedures. To come up with the five quintiles, the average proportion of piggyback loan originations was considered between the year 2001 and 2006.

Looking at the different representations, it can be accurately concluded that for all the five quintiles, the first quintile recorded the lowest percentage of piggyback originations, and this value increased progressively across the quintiles all the way to the fifth quintile, which recorded the highest percentage.

In a similar way, state foreclosure rates were also annalyzed for all the states and also within the four qintiles between the years 2001 and 2008. The average percentage of piggyback loan originations was also used in the construction of the quintiles of states.

Generally, all the five quintile states show the same trend as far as the foreclosure rates are concerned. All of them began at a slightly high value, which went down before eventually rising to its peak in the year 2008. Looking at all of them comparatively reveals that the first quintile recorded the least percentage of piggyback originations, and this value increased progressively across the quintiles, with the fifth quintile having the highest percentage of piggyback originations.

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 Wei). 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.

Works Cited

LaCour-Little, Michael, Charles A. Calhoun and Wei Yu. “What role did piggyback lending play in the housing bubble and mortgage collapse?” Journal of Housing Economics 20 (2011): 81-100.