Dec. 30 (Bloomberg) -- Attempts to loosen terms on hundreds of thousands of delinquent home loans may be hindered by so- called piggyback second mortgages that gained popularity during the U.S. housing boom, Federal Reserve researchers said.

Most of the piggyback loans, often used in place of down payments or mortgage insurance, are held by lenders different from the holders of the home loans, making it more difficult to secure approval needed for modifications, according to the study published in the December Federal Reserve Bulletin. Less than a fifth of the first mortgages and piggyback loans made in 2005 and 2006 were held by the same lender at year’s end.

Advocates for more loan modifications, including Federal Deposit Insurance Corp. Chairman Sheila Bair, say using them to prevent foreclosures will help limit losses at mortgage holders and curb the worst housing slump since the Great Depression.

Separation of the piggyback debt from the mortgages “means that for those loan transactions in which defaults occur, loss mitigation problems are likely to be more difficult,” Fed economists Robert Avery, Kenneth Brevoort and Glenn Canner wrote in the study.

Home prices in 20 U.S. cities tumbled 18 percent from a year earlier in October, the fastest rate on record, depressed by mounting foreclosures and slumping sales, according to an S&P/Case-Shiller index released today. Between August 2002 and April 2006, year-over-year price increases exceeded 10 percent every month.

Servicers ‘Overwhelmed’

Other challenges to reworking delinquent debt include limits imposed by contracts governing mortgages packaged into securities, the lack of incentives for good loan performance at third-party mortgage servicers and the soaring workloads at the companies managing outstanding loans.

“The servicers have been overwhelmed,” Federal Housing Finance Agency Director James Lockhart said today during an interview on CNBC.

Also, at least 14.9 percent of new mortgages granted for purchases of one-to-four family properties in each of the past four years were made to real-estate investors, landlords or second-home buyers, according to data in a separate section of the Fed report.

Only Owner-Occupied

Many of the “streamlined” modification programs announced by companies including Bank of America Corp., JPMorgan Chase & Co. and Fannie Mae only apply to owner-occupied properties. The programs promise changes to borrowers’ interest rates, loan amounts or other terms.

The Fed economists at the Board’s Research and Statistics Division applied computer models to data provided by lenders under the Home Mortgage Disclosure Act to identify piggyback transactions.

Home purchases involving piggybacks fell to 389,154 last year, from a peak of 1.06 million in 2006, about the same level as the prior year, according to the study. Almost 9.9 million new first mortgages, including refinancings, were issued in 2006.

The prevalence of piggyback mortgages, along with traditional home-equity loans, during the housing boom may also limit refinancings as borrowers find they own more than their homes are worth. Refinance applications are at the highest since 2003 because of lower loan rates, according to the Mortgage Bankers Association.

Subprime, Alt-A

Lenders were less likely to retain piggyback loans when the associated first mortgages were “higher-priced” loans, such as subprime and Alt-A loans, according to the study. The higher-risk loans are defaulting at the fastest pace, according to Bloomberg data.

The government has been seeking more modifications and lower rates to help curb a yearlong recession. The average rate on a typical U.S. fixed-rate mortgage fell to 5.22 percent yesterday, the lowest since 2005, from as high as 6.46 percent in October, according to Bankrate.com data.

In November, the Federal Housing Administration adjusted its Hope for Homeowners program created this year to give holders of second mortgages immediate payment for releasing their liens. The initiative allows lenders to refinance troubled loans into guaranteed debt if they forgive some of the borrowers’ balances.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

Last Updated: December 30, 2008 16:35 EST