If mortgage insurance is designed to protect lenders from borrowers who have no equity at risk in the property, doesn't this piggy-back loan defeat the purpose of mortgage insurance in the first place? Why do lenders allow it?

It still seems to me that a lot of people are taking on an unbearable amount of risk - and banks are helping them do it. I wonder who will pick up the tab if (when?) things go south...

What to Do if You Can't Put 20% Down

Appeal of Piggyback Loans Fades for Some Home Buyers; Return to Mortgage Insurance

By RUTH SIMON

December 20, 2006

Wall Street Journal

With a piggyback loan, a borrower takes out a mortgage for 80% of the home's value and finances the balance of the debt with a fixed-rate home-equity loan or a home-equity line of credit, allowing consumers to borrow as much as 100% of a home's purchase price. Piggybacks were particularly attractive when short-term interest rates were at rock-bottom levels. As recently as 2004, borrowers could get home-equity lines of credit with rates as low as 4%, well below the rate on their main mortgage. In addition, interest on home-equity loans and lines is typically tax-deductible.

With mortgage insurance, a borrower with less than 20% to put down takes out a single loan and pays a mortgage-insurance premium that can vary based on the amount the borrower puts down, credit history and other factors. For a $225,000 mortgage, for example, the insurance premium could run $50 to $100 a month. (In some cases, the lender pays the mortgage-insurance premium and charges the borrower a slightly higher interest rate.) Lenders require mortgage insurance because borrowers who put little, if any, money down are more likely to default.

The popularity of piggyback mortgages has grown sharply. Some 49% of home purchases made in the first three quarters of this year that required financing included a piggyback mortgage, up from 24% in 2002, according to SMR Research Corp., a market-research firm.