Mortgage Guaranty Insurance Corp. is asking Fannie Mae and Freddie Mac to resume rewarding consumers who finance their mortgage insurance.

Currently, if a borrower with a 10% down payment finances a mortgage insurance premium equaling 2% of the home value, Fannie and Freddie treat the mortgage not as a 90% loan-to-value mortgage, but as a 92% LTV loan.

That triggers deeper insurance requirements, increasing the overall cost of mortgage insurance for the consumer.

MGIC wants the agencies to treat such loans as no different from any other 90% LTV loan, arguing that they actually perform better than loans on which the premium is not financed.

MGIC introduced the financed premium option in 1988. Back then the agencies treated the loans more favorably, and MGIC wants them to return to that policy, said Geoff Cooper, director of corporate communications at the insurer.

In a confidential May 30 letter to Fannie Mae, MGIC's executive vice president, L.J. Pierzchalski, said consumers are turning to split mortgages as an alternative to buying insurance and that is draining business from MGIC and Fannie.

Typically, banks don't require mortgage insurance on an 80-10 or 75-15 split mortgage; they hold the smaller mortgage themselves and take the first loss, in the event of default. They may sell the first mortgage to investors.

"As a result, both MGIC and Fannie Mae are losing business and taking more risk. MGIC loses the mortgage insurance opportunity," the letter said. "Fannie Mae loses 10% to 15% of the purchase price in the form of second mortgages that go into a bank's portfolio," the letter continued.

MGIC sent a similar letter to Freddie Mac.

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