So-called piggyback loans are the latest lending tool to get panned; critics say they are being used in excess to help people buy homes they would otherwise not be able to afford.

The Hidden Risks Of Piggyback Lending, a study by the PMI Mortgage Insurance Co., a subsidiary of The PMI Group Inc. in Walnut Creek, says about 42 percent of the dollar value of home purchase mortgages involved piggyback loans during the first half of 2004, more than double the level in 2001.

Piggybacks are particularly popular in high-cost areas such as California, where prices have skyrocketed beyond the reach of many incomes, and borrowers are increasingly using the loans to stretch their buying power.

In California, during the first half of 2004, both the San Jose-Sunnyvale-Santa Clara and the Oakland-Fremont-Hayward regions had the state's highest percentage of piggyback loans used for home purchases--62 percent.

Piggyback loans get their name from a second mortgage that is "piggybacked" onto a first mortgage to compensate for buyers unable to come up with a larger down payment or any at all.

Just as recent studies have panned overuse of interest-only mortgages, zero-down programs, and easy-equity loans, piggyback loans are getting the same high-risk warning attention, in part, because they contribute to inflating housing market bubbles.

The potential for risk is that already over-extended home buyers will be left with an upside down mortgage (where the loan value is higher than the property's value) should the bubble burst and prices drop. Even worse, economic malaise, which many forecasts call for by the end of 2006, could leave home owners unemployed and unable to pay for both a first and second mortgage.

"Piggyback loans may contribute to overheating in local housing markets," said Charles A. Calhoun, the study's author. "Initially, they appear to support a rapid rise in housing values by qualifying borrowers for larger loans at higher loan-to-value ratios, but I expect that as interest rates rise and house price appreciation slows or declines, defaults will rise and borrowers could lose their homes. It's particularly worrisome given that borrowers may not fully understand the risks they face."

If the market turns on buyers, lenders could suffer, too.

"Borrowers are able to afford more expensive homes with smaller down payments, but may not be prepared for the increased payments they will face as interest rates rise. Similarly, piggybacks allow lenders to increase profits because they are originating two loans instead of one, but they may not be prepared for the one-two punch of rising interest rates and declining house price appreciation," Calhoun said.

PMI says there's a high correlation between housing markets at risk due to high home prices and markets that reveal an abundant use of the loans.

"Overlaying concentrations of piggyback lending on top of PMI's assessment of the likelihood of depreciation in the top 50 metropolitan statistical areas (MSAs) reveals a strong positive correlation between the rate of utilization of piggyback loans and market risk,"" said Mark Milner, chief risk officer at PMI.

Among MSAs ranked in the top 10 in terms of market risk, 7 regions--all of them in California--had more than half of their mortgage lending for home purchases in piggybacks during the first half of 2004.

Real estate writer Broderick Perkins, executive editor of San Jose-based DeadlineNews.Com, writes regularly for this newspaper.