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.
