Loanto Value LTV Ratio

For many years, LTV ratio was the principal factor used by rating-agency models in determining expected losses. Today, rating-agency models are much more complex, using FICO scores and other variables to forecast credit performance. However, LTV ratio is a primary variable in credit performance and, to a lesser extent, prepayments. A high LTV ratio typically indicates that a buyer is stretching to make monthly mortgage payments. Hence a high LTV ratio often is associated with a high DTI ratio, as well as other weak credit indicators.

There is also a direct link between LTV ratio and loss severity. Traditionally, the agencies would not insure loans that had LTV ratios over 85%, and any loan above 80% needed mortgage insurance. However, in recent years, the agencies instituted programs encouraging homeownership, which now allow LTV ratios of up to 95%. The additional risk represented by these loans is absorbed by mortgage insurance companies. LTV ratios in the agency and jumbo markets average around 70%. In the higher-risk sectors, such as alt-A and subprime, LTV ratios average 80% to 83%, 10% or more higher than in agency and jumbo programs.

Secrets of the Credit Industry

Secrets of the Credit Industry

Legal strategies that credit bureaus, creditors and debt collectors do not want you to know! How to use consumer credit protection laws, without hiring a lawyer, and without going to court! At some point in your life, either you, or someone you know will need this information.

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