Piggyback loans
PMI Companies feel profit
pinch as buyers go for 'piggyback loans'Newlyweds
Michelle and Samuel Raccoon knew that without
20 percent nonpayment for a house, they’d
face the added expense of private mortgage Insurance.
They weren't sure they could afford it. A mortgage
broker however showed the Philadelphia couple
hoe 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 Raccoon 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 Riccobonus, 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 company’s
profits. Piggyback haven't yet Made the mortgage
insurance industry irrelevent, but the potential
is there.
"(PMI companies) really haven't come up
with the answers,” said Jack Guttentag,
professor of finance emeritus at the wheaten
school of the University of Pennsylvania.”
This cuts right into the heart of their business."Guttentag's
column on mortgages runs in this section. How
much business it undercuts is difficult to determine
because no hard statistics exist. But people
within the industry estimate that 25 to 40 percent
of the industry Traditional homebuyer business
is lost to piggyback loans. Radian's president
and COO, Roy Kashmir, estimates 25 to 33 percent
of buyer business is lost industry-wide. 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 groups Director of
product
Development and captive reinsurance.
Mortgage Guaranty Insurance Corp. estimates
the figure in 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 that, 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. The programs may differ in their details,
but all are
Attempts to get past the Knee-jerk reaction
against private mortgage insurance that may
consumers have.
"We as an industry have to figure out ways
to make it more palatable to the consumers,"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,
Gutentag said. Mortgage insurance companies
and lenders have a delicate relationship. The
insurance companies tradionally 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, Gutentag 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 Pigeon a page that outlines
what a company considers the true facts about
piggyback loans: Piggyback loans donor save
consumers money; avoiding mortgage insuranceCan
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 a fairlyTales,
it’s just not true." The mortgage
insurance Companies of America doesn't have
data on the use of piggybacks, but it doesn't
have a media kit with comparisons with private
mortgage Insurance and piggyback loans.
Still, as long as consumers like the Raccoons
learn about piggyback loans and believe they
can help cut their housing costs, the debate
over private mortgage Insurance versus piggyback
may come down to one simple concept: dollars
and cents.
"We're saving money in interest in the
long run,” Michelle Raccoon said.
