After losing market share for five consecutive years, much of it to piggyback home equity loans, private mortgage insurers appear to have stanched the bleeding this year.
They got help from rising short-term interest rates, which made piggybacks more expensive for borrowers, and from alarming data about the quality of first-lien loans in piggyback arrangements, which made securitizing such loans costlier for lenders.
The insurers received yet another benefit this month, when President Bush enacted a federal tax deduction for premiums on mortgage insurance. The deduction should reduce a long-standing advantage of piggybacks, whose interest payments were already deductible, and mortgage insurers are broadcasting the enactment to consumers, mortgage brokers, and lenders.
For example, AIG United Guaranty, the mortgage insurance unit of American International Group Inc., has incorporated marketing materials that illustrate the new benefit to originators into its "Take Another Look at Mortgage Insurance" campaign.
Still, it is hardly certain whether this year's developments have set the stage for mortgage insurance to make a roaring comeback. For one thing, the new deduction seems likely to have a more modest impact than suggested by the years the insurers spent lobbying for it. To get a perspective on its scope, Congress expects the deduction to cost the government just $91 million of revenue next year, after which it would be up for renewal.
Moreover, both insurers and piggyback providers say short-term rates - to which second liens typically are pegged - are more fundamental to the appeal of piggybacks than the relative tax implications.
Mike Zimmerman, the vice president of investor relations for MGIC Investment Corp., the biggest mortgage insurer, said that from the Milwaukee company's tracking of the market, "we have seen the incidence of piggyback start to decline."
Although "it's a difficult number to get at," at its peak early last year "around 45% to 50% of loans eligible for mortgage insurance were going piggyback," he said. "We would now estimate that down to about 30% or 35%."
MGIC expects the market share of "flow" insurance, which is written one loan at a time, as opposed to covering mortgage pools, to climb to 12% by late next year, from the current share of 10%, Mr. Zimmerman said.
But he would not project a gain attributable directly to the new deduction, and he said he does not expect mortgage insurance to return to its former prominence.
"Historically, 5% to 10% of originations would have been piggyback," Mr. Zimmerman said. "We don't see it going back to those days."
The deduction is relatively narrow. Households with annual incomes of up to $100,000 will be able to deduct the full cost of mortgage insurance premiums next year. The benefit drops quickly at higher income levels and does not apply at all to households earning more than $110,000.
Also, Bob Walters, the chief economist at Quicken Loans Inc. in Livonia, Mich., said that by his calculations, a household typically would have to make more than $50,000 a year for the new benefit to outweigh the standard 2007 deduction of $10,700 for married couples.
Mr. Zimmerman said he does he not consider the income boundary a drawback. "The income limit is really something we're very comfortable and upbeat about, because we're really a first-time homebuyer product."
Quicken Loans continues to market its "PMI Buster" piggyback loan by portraying it as a way to avoid mortgage insurance - and its potential tax disadvantages - and the lender appears unlikely to change course. Though Mr. Walters said Quicken is fundamentally "agnostic" on the issue, he also said the deduction simply lets insurers "catch up to the advantage that piggyback mortgages have had all along, but in many cases it still doesn't catch up fully."
Because of the cheap money at the short end of the yield curve, "up until recently, it's almost always been better to take the first and the second" lien than to get mortgage insurance, he said. Also, since the tax savings generally would be realized at the end of the year, "for people to whom cash flow is important, they'd still prefer to take a second mortgage."
Several analysts said the new deduction, though helpful to mortgage insurers, would have little direct financial benefit to them.
"It's not something that will change my model," said Geoffrey Dunn of KBW Inc.'s Keefe Bruyette & Woods Inc. "The perception impact is going to be a lot more important than the fundamental impact."
Michael Grasher at Piper Jaffray Cos. said that though the deduction is "nice to have, it's not going to create a windfall" for anyone. "The direction of rates will have more of an impact than the tax deductibility."
According to Mr. Walters, one thing that has not changed is consumer "disdain" for mortgage insurance - an issue Mr. Zimmerman acknowledged.
"Consumers like the product as they go into the homebuying process and up to the point of closing, because it allows them to get into the home - either a larger home, or a home sooner than they would otherwise," he said. "But once they sign the documents for the mortgage, the product kind of loses its value to the consumer," who often then sees it as benefiting the lender alone.
Another thing that could make the new deduction a less decisive factor is the growth of lender-paid mortgage insurance, where the cost of coverage is defrayed by a higher interest rate. Such products are designed to offer a tax benefit similar to a piggyback.
Mr. Walters expressed discomfort with the lender-paid setup, saying the higher interest rate on such loans gives borrowers more incentive to refinance. But MGIC said that the lender-paid "SingleFile" product it introduced in 2004 accounted for 10.1% of the insurance it wrote on individual mortgages in the third quarter.
Over the summer Standard & Poor's Corp. rattled the markets by releasing a study that said first liens in piggyback arrangements were up to 50% more likely than stand-alone mortgages to default. As a result, the rating agency ratcheted up the credit enhancements it prescribes for securities backed by such assets.
The change did not reduce the prevalence of piggyback loans in all credit categories. In the first quarter 34.6% of subprime first liens in securitizations rated by S&P had simultaneous second liens; by the third quarter the percentage had fallen to 31.75%. For prime loan deals, the share dropped 1.78 percentage points, to 29.22%, but for alternative-A loans, it rose 1.62 percentage points, to 44.33%.
Jaret Seiberg, a financial services policy analyst at Stanford Washington Research Group, said that if the deduction is renewed and granted to higher-income households, its reverberations could intensify.
The deduction "opens the door for the PMI providers to both extend and expand the tax exemption," he said. "The bigger the exemption and the longer it lasts for, the bigger the threat" to piggyback providers.
