The Piggyback Tsunami: 'Borrowers going into default will be committing financial suicide if they get a piggyback loan.'.

SEATTLE -- Citing recent industry data, at least one mortgage expert and customer advocate is warning customers and lenders about the high default risk associated with piggyback loans, or options when borrowers agree to close two loans together.

Harj Gill, founder, president and CEO of American Mortgage Educators Inc., a consumer advocate group based in Seattle, maintains homeowners should be aware of the risk and "take immediate action to avoid going into default."

He points to the most recent Standard & Poor's analysis of 640,000 piggyback first-lien mortgages in bond pools. Data from the study indicate that first-lien mortgages connected with piggyback loans are 43% more likely to go into default than standalone first mortgages of comparable size, marking a 50% increase in default rate among borrowers with a FICO score of 660 or less.

Piggyback loans, often called exotic mortgages, Mr. Gill said, are one of many nontraditional mortgage products that have put homeowners at risk of foreclosure, more so because as a rule borrowers with little or no downpayment chose this option to avoid paying mortgage insurance. It is a good solution if the goal is to avoid mortgage insurance, he said, "but a terrible long-term strategy."

Typically these borrowers get a first loan at 80% of the home's value and a second loan through a home-equity loan or a home-equity line of credit. In many cases borrowers with adjustable-rate piggyback mortgages are not prepared to deal with the rate hikes.

In addition to risk inherited in ...