Newlyweds Michelle and Samuel Riccobono knew that without a 20 percent down payment for a house they’d face the added expense of private mortgage insurance. They weren’t sure they could afford that.
A mortgage broker, however, showed the Philadelphia couple how they could avoid the cost of private mortgage insurance and cut their monthly payments: a piggyback loan. Instead of going with a 100 percent mortgage as they’d originally planned, they opted for an 80 percent first mortgage with a second mortgage for the remaining 20 percent “piggybacked” on. That decision saved them about $250 a month because of the lower interest rate they got on the primary mortgage, Michelle Riccobono said.
“We’d never heard of piggyback loans until our broker explained them,” she said.
The concept of piggyback loans might be new to consumers like the Riccobonos, but the private mortgage insurance industry is sitting up and taking notice. Under a piggyback loan structure, borrowers obtain a second mortgage at purchase, which reduces the first mortgage loan-to-value ratio to 80 percent and eliminates the need for private mortgage insurance. Their popularity has soared in recent years and is starting to cut into mortgage insurance companies’ profits. Piggybacks haven’t yet made the mortgage insurance industry irrelevant, but the potential is there.
“(PMI companies) really haven’t come up with an answer,” said Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania. “This cuts right into the heart of their business.”
How much business it undercuts is difficult to determine since no hard statistics exist. But people within the industry estimate that anywhere from 25 to 40 percent of the industry’s traditional home buyer business is lost to piggyback loan plans.
Radian’s president and COO Roy Kasmar estimates 25 percent to 33 percent of buyer business is lost industrywide. PMI Group has seen some of its volume lost to piggybacks, but that has been offset by an increase in investors seeking out insurance for piggybacked loans, said Joel Luebkeman, PMI Group’s director of product development and captive reinsurance.
Mortgage Guaranty Insurance Corp. estimates the figure is 40 percent, and that of that lost volume, about 80 percent are the most desirable home buyers – those with FICO credit scores of 700 and above. That’s a definite risk, said Geoffrey Cooper, MGIC’s director of emerging markets.
And it’s a risk that the industry is trying to mitigate.
Mortgage insurance companies have released a flurry of new products designed to compete with piggyback loans. MGIC, for example, has introduced its SingleFile program, a lender-paid mortgage insurance that carries a slightly higher interest rate than traditional borrower-paid insurance. Despite the higher rate, MGIC contends SingleFile will result in lower monthly payments than piggyback mortgage structures.
Radian Guaranty has launched its Free After Five product, which is mortgage insurance that automatically cancels for the borrower after five years. In exchange, borrowers pay a slightly higher monthly payment. Coverage continues for the lender or servicer until the mortgage reaches 78 percent loan-to-value.
PMI Group now offers its Super Single program, in which borrowers pay the insurance premium upfront instead of making monthly payments.
The programs may differ in their details, but all are attempts to get past the knee-jerk reaction against private mortgage insurance that many consumers have.
“We as an industry have to figure out ways to make it more palatable to the consumer,” Luebkeman said.
That natural dislike of mortgage insurance could account for some of the recent surge in piggybacks. And as the housing market has remained hot and loan delinquencies low, lenders have pushed the piggyback structures to consumers, Guttentag said.
Mortgage insurance companies and lenders have a delicate relationship. The insurance companies traditionally have relied upon lenders to market their products to consumers, but more lenders are discovering an additional revenue source by not pushing private mortgage insurance, Guttentag said. As a result, the insurance companies are “trying rather cautiously to get to the consumer” directly, which is evident in some of their marketing efforts.
MGIC has published a brochure called, “The 3 little truths of piggyback loans,” that is available to consumers through lenders’ offices. It features a menacing looking pig on a page that outlines what the company considers the true facts about piggyback loans: Piggyback loans do not save consumers money, avoiding mortgage insurance can create problems in the future and piggyback loans are not temporary solutions.
“Home buyers take themselves on this piggyback ride in an effort to avoid private mortgage insurance and get a better deal,” the brochure states. “However, like all fairy tales, it’s just not true.”
The Mortgage Insurance Companies of America doesn’t have data on the use of piggybacks, but it does have a seven-page media kit with comparisons between private mortgage insurance and piggyback loans. The front-page story in the group’s newsletter, PrivateMI Perspective, features a couple who bought their condo using private mortgage insurance rather than a piggyback loan.
Still, as long as consumers like the Riccobonos learn about piggyback loans and believe they can help cut their housing costs, the debate over private mortgage insurance versus piggybacks may come down to one simple concept: dollars and cents.
“We’re saving money in interest in the long run,” Michelle Riccobono said.
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