Mortgage insurers have won a victory in the fight to protect their turf against incursions by lenders.
Their efforts to discourage the use of other forms of credit enhancement paid off last month, when the Federal Deposit Insurance Corp. joined two other banking regulators in approving a new rule that would make it more expensive for some lenders to hold so-called 80-10-10 mortgages.
In an 80-10-10, also known as a piggyback loan, the borrower makes a 10% down payment and takes out an 80% first mortgage and a 10% second mortgage with a shorter term and a higher rate.
The 80-10-10 loan has been touted to consumers as preferable to mortgage insurance because, unlike insurance premiums, interest payments on the second loan are tax-deductible.
It was also attractive to lenders because by holding the second mortgage, they would capture a payment stream that would normally have gone to mortgage insurers.
But the new rule, expected to go into effect April 1, would force national banks to hold almost twice as much risk-based capital to cover possible defaults on those loans as before. State-chartered banks already face the higher capital requirement.
Active originators of 80-10-10 loans include Chase Manhattan, Dime Bancorp, and World Savings and Loan Association (a subsidiary of Golden West Financial), according mortgage brokers. None of the three were available for comment.
The new rule would only increase the capital burden for portfolio lenders that hold both the 80% first lien and the 10% second. Lenders that sell off the first piece but retain the second would not feel any difference.
But another proposal being considered by the FDIC would, in certain cases, greatly increase the amount of capital a lender that sold the first mortgage would have to hold against the second.
"This may be a short respite for lenders who hold the 10% and not the 80%," said Karen Shaw Petrou, president of ISD/Shaw consulting.
The insurers say the regulatory changes validate their argument that the 10% second mortgage is an inadequate substitute for private mortgage insurance - and should be treated as such.
"Extensions of credit to a single borrower at the same time for the same purpose are the economic equivalent of that same loan. It's in recognition of the risk of the instrument that the regulators have ruled accordingly," said Curt S. Culver, president and chief operating officer of Mortgage Guaranty Insurance Corp., Milwaukee.
The mortgage insurance industry had responded to the 80-10-10 loan with products of their own that made the piggyback mortgage "less viable," Mr. Culver said.
These policies allowed borrowers to pay a single premium up front to insure home loans with 10% down payments and avoid the costs associated with closing multiple loans.