Newlyweds Michelle and Samuel Riccobono knew that without a 20 percent down payment for a house, they would face the added expense of private mortgage insurance. They weren't sure they could afford that.
A mortgage broker 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 had planned, the Riccobonos 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.
Piggyback loans have the private mortgage insurance industry 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 during recent years and is starting to cut into mortgage insurance companies' profits. Piggybacks haven't 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 because no firm statistics exist. But people within the industry estimate that 25 percent to 40 percent of the industry's traditional homebuyer business is lost to piggyback loan plans.
Roy Kasmar, president and chief operating officer of mortgage insurance company Radian Guaranty, estimated that 25 percent to 33 percent of buyer business is lost industrywide.
PMI Group, another insurer, has lost volume to piggybacks, but that has been offset by an increase in investors seeking insurance for piggyback loans, said Joel Luebkeman, PMI Group's director of product development and captive reinsurance.
Mortgage Guaranty Insurance Corp. estimated the lost business at 40 percent, and that of the lost volume, about 80 percent are the most desirable homebuyers, those with high credit scores that make them less of a risk.
Mortgage insurance companies have released a flurry of new products designed to compete with piggyback loans. MGIC introduced a lender-paid mortgage insurance that carries an interest rate slightly higher than that for traditional borrower-paid insurance. Despite the higher rate, the company says, it results in lower monthly payments than piggyback mortgage structures do.
"We as an industry have to figure out ways to make it more palatable to the consumer," Luebkeman said.
Barbara E. Schmitt, an account executive with Triad Guaranty Insurance Corp. in Maryland and Northern Virginia, and a past president of the Maryland Mortgage Bankers Association, said piggyback loans have become more popular during the past two years.
"It's always been there, but it just really jumped up now," Schmitt said.
The 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.
About 5.5 million people pay mortgage insurance premiums of $50 to $150 a month. Those costs are not deductible on federal taxes. Some federal lawmakers are working to make mortgage insurance premiums deductible. The Washington-based Mortgage Insurance Companies of America, an industry group, said last month that a bipartisan group of U.S. House of Representatives members have backed a bill that would provide such tax relief.
A law passed in 1998 requires lenders to automatically cancel mortgage insurance for homeowners who have paid a certain percentage of their loan.
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.
MGIC has published a brochure, "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 truth about piggyback loans: Piggyback loans do not save consumers money, avoiding mortgage insurance can create problems, and piggyback loans are not temporary solutions.
"Homebuyers take themselves on this piggyback ride in an effort to avoid private mortgage insurance and get a better deal," the brochure says. "However, like all fairy tales, it's just not true."
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.
A Sun staff writer contributed to this article.