Piggyback loans – seconds that were part of '80-10-10' loan structures – were 21% more likely to default than a loan with mortgage insurance, according to a new study from Promontory Financial Group.
However, the study was conducted on behalf of Genworth Financial, which controls the nation’s fifth largest MI in terms of policies-in-force. During the boom years piggyback loans flourished, causing a huge loss in business for the MI industry.
The new study looks at a different data set than a January 2011 report on the same topic, and is more specific to the MI vs. piggyback debate.
This study looked at 5.7 million mortgages originated between 2003 and 2007. For the five-year period, loans with MI had a cumulative delinquency rate of less than 20%, while the piggybacks were at 29%.
In 2003, the insured loans had a higher delinquency rate (by 270 basis points), while the next year, the delinquency rates were essentially the same. But in the next three years, the piggyback loans had a higher delinquency rate by seven percentage points, eight percentage points and seven percentage points, respectively.
An anomaly in the figures shows that while the piggybacks had higher delinquencies than loans with MI across the four combined loan-to-value ratio spectrums (80-85, 85-90, 90-95 and 95-100), the delinquency rates declined for the piggybacks between the 80-85 and 85-90 buckets and again between the 85-90 and 90-95 buckets.
Another unusual finding is that a refinance loan that used a piggyback structure was twice as likely to default than a purchase loan -- 38% compared with under 19%.
