Local lenders see comeback in private mortgage insurance
Sub-prime collapse makes PMI more desirable
The same insurance policy that used to scare customers away from Savers Cooperative Bank in Southbridge is now helping to reel them back in.
Melissa Eagles, assistant vice president for mortgage lending at Savers, said that until recently, the bank’s refusal to offer second, sub-prime loans, or "piggyback loans," to borrowers without a standard 20 percent down payment on a new home sometimes cost the bank customers. The piggyback loans cover the cost of the down payment.
Borrowers typically take out the riskier second loans to avoid paying private mortgage insurance (PMI), which banks require if the borrower cannot cover the full 20 percent down payment.
Bringing customers back
"We’ve never written piggyback loans, and we’ve sometimes lost customers who chose to go that way," Eagles said. "But we’ve heard less of those stories lately. We’ve actually been able to keep customers because of the PMI products we offer."
In the wake of the sub-prime collapse, many borrowers see the option of PMI as a more cost-effective means of borrowing with less than a 20 percent down payment, said Bill Mullin, president of Waltham-based NE Moves, the in-house mortgage lender for real estate giant Coldwell Banker.
As recently as a few years ago, low interest rates on second mortgages and piggyback loans made them attractive, Mullin said. But as rates rose, the bargain bin dried up.
"The math began to change, and the rates began rising, particularly on shorter term second loans," Mullin said. "For most people, they’re less likely to have to keep mortgage insurance on the books for a long time (because they can often pay it off relatively quickly). If they keep it for two or three years, then they can drop it, which adds up to significant savings, rather than paying rising rates on a second mortgage."
PMI is an insurance policy banks take out against their borrowers in the event a borrower cannot make payments and falls into foreclosure. The more a borrower can put down as a down payment, the less they pay in PMI premiums, Eagles explained.
Standard PMI coverage offers little to no protection to the borrower, Eagles said. As a result, borrowers traditionally have shied away from the expensive coverage and sought ways to avoid it.
But state-subsidized policies such as MassHousing’s MI Plus program are gaining in popularity because of new coverage initiatives.
MI Plus offers borrowers a safety net, making as many as six months worth of payments over the term of the loan, explained Eric Gedstad, a spokesman for MassHousing. All participants in a MassHousing loan program that put down less than a 20 percent down payment are automatically enrolled in MI Plus.
"Are we advocating MI Plus? Absolutely," Gedstad said. "Our borrowers get six months of protection at no extra charge and the rates are about the same (as traditional PMI). There’s a terrific peace of mind benefit and it’s cheaper than an 80-20 piggyback loan."
Both Mullin and Eagles say they advise their borrowers, particularly first homebuyers, to strongly consider MassHousing loans and MI Plus.
For borrowers still wary of paying mortgage insurance, but also hesitant to enter the volatile sub-prime piggyback market, there are some options.
The Massachusetts Housing Partnership has been offering its SoftSecond loan program since 1991. It was designed to help low-income buyers purchase a home with little money down, said Clark Ziegler, executive director of the MHP.
Working on the same principal as a piggyback loan, the SoftSecond program offers a traditional 30-year mortgage with a second, low initial-interest loan to cover the down payment.
Unlike traditional sub-prime loans, however, the SoftSecond loan rate won’t skyrocket after a few months. It is paid as an interest only loan for the first 5 years, after which payments are gradually increased between years five and 10 to coincide with assumed income growth. After that, payments are leveled off, Ziegler said.
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