PMI Sees Piggyback Loan Risk

PMI Mortgage Insurance Co., Walnut Creek, Calif., has issued a study that said the increased use of piggyback loans could pose a risk to the financial strength of the mortgage system.Piggybacks, also known as 80-10-10 loans, add a second mortgage to the transaction so that the borrower does not need to get mortgage insurance. The increased use of this product has harmed the market share of PMI and its competitors. "Piggyback loans may contribute to overheating in local housing markets," said Charles Calhoun, the author of the PMI study. "Initially, they appear to support a rapid rise in housing values by qualifying borrowers for larger loans at higher loan-to-value ratios -- but I expect that as interest rates rise and house price appreciation slows or declines, defaults will rise and borrowers could lose their homes. It's particularly worrisome given that borrowers may not fully understand the risks they face." PMI chief risk officer Mike Milner said that among the top 10 metropolitan statistical areas PMI considers at risk for depreciation, seven "had more than half their mortgage lending for home purchases in piggybacks during the first half of 2004."