PMI industry fights back against piggyback loans -- Page 2

The private mortgage insurance industry is responding to the challenge of piggyback mortgages with more than just a plea for borrowers to compare the numbers. One riposte is subtle: Mortgage insurance people avoid using the word "piggyback," possibly because the word carries carefree connotations of a gay childhood. Instead, they call piggybacks "MI avoidance" or "split-structure" loans.

PMI industry pitches alternatives

MGIC, the largest mortgage insurance company, portrays the piggyback loan as a mean, snorting pig in the company's marketing materials for SingleFile, a product designed to kick piggybacks in the snout. SingleFile's Web site sports a humorous parody of a political ad in which piggyback loans are accused of voting against Christmas. (The intended audience is mortgage lenders and brokers, not consumers.)

With SingleFile, the borrower doesn't pay a monthly mortgage insurance premium. Instead, the lender charges a higher interest rate -- a quarter-point to a half-point higher -- and the lender pays for mortgage insurance. MGIC offers a comparison calculator. SingleFile is less expensive than other types of mortgage insurance, because it is offered only to low-risk borrowers who have excellent credit. The main drawback is that you can't cancel it by getting the house reappraised. To get rid of SingleFile, you have to refinance the mortgage.

It's a good deal for people who can qualify, says Patrick Sinks, executive vice president of field operations for MGIC.

"The borrower only needs to have one loan rather than two loans," Sinks says. "He has only one payment, has lower closing costs. By virtue of the fact that the lender has him pay it as an interest rate, that interest is tax deductible."

PMI industry seeks tax break

Tax-deductibility is an important issue with the industry. Mortgage insurers tried but failed last year to persuade Congress to make mortgage insurance tax deductible for families earning up to $100,000. "It would level the playing field," Lubar says, because interest paid on piggyback mortgages is deductible.

The industry is trying again this year, with a bill introduced in January by Sen. Gordon Smith, R-Ore. MICA estimates that about 12 million homeowners would save an average of $200 annually on their taxes if the bill becomes law, a reduction of $2.4 billion in tax revenue. Smith told his Senate colleagues that the law would make homeownership affordable for 300,000 families a year.

Even if the deductibility bill is shot down again, the mortgage insurance industry will continue to swing a machete against piggyback loans. "Piggybacks hog your equity," MICA's Lubar says, meaning two things: You build equity slower with piggyback loans, and a piggyback prevents you from getting a home equity loan or line of credit to pay for home improvements or consolidate debts.

Lubar notes that many piggyback second mortgages have variable rates -- and they're likely to go up over the next few years. And he points out that you have to pay closing costs if you eventually refinance the first mortgage to get rid of the second, piggyback, loan.

Because borrowers, too, eventually want to get the piggy off their backs.