If you're short on downpayment cash, you don't need to piggyback first and second loans to swing a home purchase anymore. That's the message from giant mortgage underwriter Mortgage Guaranty Insurance Corp. (MGIC) to thousands of home buyers who have minimal downpayment money but high credit scores.

Many such buyers have sought to avoid paying private mortgage insurance (MI) premiums by piggybacking second mortgages or equity lines of credit on top of conventional first mortgages. The combination of first and second liens allows downpayments anywhere from zero to 15 percent, with no mortgage insurance. Normally lenders require insurance whenever borrowers buy houses with less than 20 percent down.

Now MGIC is rolling out what it says is a lower-cost alternative, in which insurance premiums are fully tax-deductible because they are included in the interest rate on the note. Beginning this week, MGIC is offering its "SingleFile" piggyback alternative to cash-short, high credit score home buyers through a network of hundreds of participating lenders nationwide. Eligible FICO scores are 700 and up; total household debt-to-income ratios cannot exceed 45 percent; downpayments can be as low as zero and loan amounts as high as $650,000.

The program essentially consists of lender-paid mortgage insurance with premium charges discounted by 40 to 65 percent off regular borrower-paid insurance. Here's an example of how SingleFile compares with a typical piggyback plan. Say you're looking to buy a $200,000 home but you don't have cash for a downpayment.

If you go the traditional piggyback route, and seek to avoid paying non-tax-deductible private mortgage insurance premiums, you might get a $160,000 fixed-rate 30-year mortgage at 6.25 percent. That represents 80 percent of the home price. To make up the 20 percent balance, the lender would agree to a $40,000 15-year second mortgage at 7.75 percent. The combined monthly principal and interest payments on the two loans would total $1,362 ($985 on the first, $377 on the second). All the interest payments would be tax-deductible.

Now for MGIC's new alternative: The first mortgage would be for the full $200,000 price of the house. The note rate would be half a point higher than the competing first mortgage in the piggyback -- 6.75 percent versus 6.25 percent. There would not be a second mortgage, but the half-point higher note rate would pay for private MI coverage for the lender.

The kicker: The SingleFile monthly principal and interest would be $65 less than the piggyback ($1,297 versus $1,362). And all the mortgage interest would be tax-deductible since it's financed. Equally important, according to MGIC, is the fact that the insurance premiums are risk-based priced -- that is, substantially discounted to home buyers who can pass the minimum FICO test.

Behind the rollout of the new program is a sobering reality for MGIC and other loan underwriters: Piggyback financing, especially in high-growth, hot markets on the West coast -- has been siphoning off home buyer customers who represent the best credit risks. MGIC executive vice president Patrick Sinks estimated that 40 percent of the mortgage insurance industry's traditional home buyer business is being lost to piggyback plans offered by banks. Eighty percent of that lost volume consists of 700-plus FICO home buyers, according to Sinks, "so that's an incredible threat."

The SingleFile product attempts to deal with borrower criticisms of private MI -- non-deductibility and high premium costs -- and to exploit perceived vulnerabilities in the piggyback structure. Among the latter are negative features often associated with the second liens in the piggyback deals -- balloon payments, unpredictable variable rates, and prepayment penalties. The MGIC alternative has none of them.

But there is a key drawback to SingleFile: Although the loans carry private MI, it is non-cancelable, unlike traditional borrower-paid private MI. On the flip side, however, argues Sinks, lenders themselves are far better covered against default risk on high-ratio loans when insurance is built into the mortgage itself. As a result, many lenders may be eager to push the new SingleFile concept to customers who otherwise would have only been interested in a piggyback first and second.

Published: August 23, 2004

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.