updated 11/8/2007 7:33:28 PM ET 2007-11-09T00:33:28

The common practice of homebuyers with shaky credit taking out second mortgages for downpayments is ending because there’s no investor demand for securities backed by such loans.

The availability of second-mortgage financing for subprime borrowers has all but disappeared, according to a trade publication’s survey last month of more than 1,000 mortgage bankers and brokers.

Typically, homebuyers who couldn’t come up with 20 percent of the purchase price for a cash downpayment were required to buy mortgage insurance from companies like PMI Group Inc., Radian Group Inc. and MGIC Investment Corp. to protect lenders from default.

But in 2005 and 2006, at the peak of the housing boom, 22 percent of new mortgages had “piggyback” second loans used for downpayments, according to a recent Federal Reserve analysis of home loan data.

The downside, as many lenders and investors discovered, is that if a borrower defaults, the holder of the second mortgage typically gets nothing, even after a foreclosure sale.

The survey, published by Inside Mortgage Finance, a Bethesda, Md.-based trade publication, found 83 percent of lenders and brokers said there was no market in September for second mortgages made to borrowers with weak credit histories and not enough cash to make home purchase downpayments.

The survey is “one of the most dramatic examples” of how the housing market downturn is affecting the way mortgage industry players behave, said Thomas Popik, the survey’s creator and a principal with Nashua, N.H.-based research firm Geosegment Systems.

For so-called “Alt-A” mortgages that require limited verification of a borrower’s current income, 61 percent of the bankers and brokers said there was no interest in offering a second mortgage.

Part of the deteriorating outlook on defaults is that increasing numbers of borrowers are unable to make higher mortgage payments as their initial low “teaser” loan rates reset. The problem is expected to worsen in 2008.

Federal Reserve Chairman Ben Bernanke told federal lawmakers Thursday that an average of 450,000 subprime mortgages will reset to higher rates each quarter through the end of next year.

Surging default rates have battered institutional investors who were big buyers of mortgages that were pooled to spread credit risk.

Some lenders have decided to exit the market for second-mortgage securities. As of Dec. 31, Citigroup Inc.’s CitiMortgage unit, which buys loans from banks and credit unions, will stop purchasing second mortgage and home equity loans.

Mark Rodgers, a Citi spokesman, said in an e-mail that the decision was “reached as we continue to monitor the market and focus our business on products and programs appropriate for the market.” Citibank still offers home equity loans directly to consumers through its Citibank division.

The survey found second mortgages are still available for borrowers with high credit scores. However, defaults on second mortgages for borrowers with strong credit are also rising.

As of July, the percentage of second-mortgage borrowers with strong credit who were 60 or more days delinquent had more than doubled from a year earlier to 1.3 percent, according to research firm FirstAmerican LoanPerformance.

A Fed survey conducted in early October found that 41 percent of responding banks said they had tightened loan standards either “considerably” or “somewhat” for mortgages offered to borrowers with strong credit histories, up from about 15 percent of banks who reported tighter standards in July.

As for borrowers with weak credit: 40 of 49 banks said they no longer offer subprime mortgages.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.71%
$30K home equity loan FICO 5.26%
$75K home equity loan FICO 4.70%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.42%
13.42%
Cash Back Cards 17.94%
17.94%
Rewards Cards 17.14%
17.14%
Source: Bankrate.com