How Important Is Down Payment in Determining Default?

Source: DSNews.com

The Federal Housing Finance Agency (FHFA) recently released a working paper on the impact of down payment amounts on loan performance at the GSEs and Federal Housing Administration (FHA). In light of new regulations and increased focus on underwriting standards, the agency issued the findings, and overall found a nonlinear relationship between loan-to-value (LTV) ratio and foreclosure rates.

Making sense of the story

• For loans with FICO scores of 620 and debt-to-income (DTI) ratios of 31 percent, the foreclosure rate for GSE loans with 100 percent LTV is a little more than twice that of loans with 80 percent LTV.

• When it comes to FHA loans with the same credit characteristics, the foreclosure rate is almost three times as much among loans with LTVs of 100 percent compared to loans with LTVs of 80 percent.

• LTV ratios hold a stronger relationship with foreclosure rates among FHA loans than GSE loans.

• The FHFA found that the LTV-foreclosure rate relationship is sensitive to FICO. This finding was evident when observing various LTV ratios among different classes of FICO scores.

• According to the FHFA, once LTV rises above 95 percent, the foreclosure rate tends to correlate less with LTV ratio.

• The relationship between LTV and foreclosure is most dramatic between LTVs of 90 and 95 percent when it comes to FHA loans.

Amid new regulations and increased focus on underwriting standards, the Federal Housing Finance Agency recently released a working paper on the impact of down payment amounts on loan performance at the GSEs and Federal Housing Administration (FHA).

Overall, the federal agency found a nonlinear relationship between loan-to-value (LTV) ratio and foreclosure rates.FHFA also determined that credit score plays an important role alongside LTV ratios in determining the likelihood of foreclosure.

LTV ratios hold a stronger relationship with foreclosure rates among FHA loans than GSE loans, according toFHFA. “The implication is that the same level of change in original LTV requirement would have a larger impact forFHA borrowers than for GSE borrowers,” the FHFA stated in its working paper.

Among loans with FICO scores of 620 and debt-to-income (DTI) ratios of 31 percent, the foreclosure rate for GSE loans with 100 percent LTV is a little more than twice that of loans with 80 percent LTV.

For FHA loans with the same credit characteristics, the foreclosure rate is almost three times as much among loans with LTVs of 100 percent compared to loans with LTVs of 80 percent.

When observing various LTV ratios among different classes of FICO scores, FHFA found, “the LTV-foreclosure rate relationship is sensitive to FICO.”

For example, raising LTV from 80 percent to 90 percent on a loan for a borrower with a FICO score of 620 increased the likelihood of foreclosure by 4.46 percentage points.

Making the same change in LTV to a loan for a borrower with a FICO score of 700 increased the likelihood of foreclosure by half that—2.23 percentage points.

For FHA loans, which are more sensitive to changes in LTVratio, the relationship between LTV and foreclosure is most dramatic between LTVs of 90 and 95 percent. This trend carries across all FICO scores observed.

Once LTV rises above 95 percent, the foreclosure rate tends to correlate less with LTV ratio, according to FHFA.

Meanwhile, DTI ratio correlated strongly with foreclosure rate. “As expected, across all LTV levels, borrowers with a higher DTI had a higher foreclosure rate,” FHFA stated.

However, the “LTV-foreclosure rate relationship has a relatively modest sensitivity to the DTI level,” FHFAfound.

When comparing LTV rates among delinquency rates,FHFA found similar relationships to what it found among LTVs and foreclosures.

How Much Mortgage Loan You Can Qualify?

Fixed-rate jumbo mortgages make a comeback
Source: The Wall Street Journal

Just a year ago, 30-year, fixed-rate jumbo mortgages were hard to find in some high-price markets. Now, many lenders are offering fixed jumbos – with very competitive rates.

Making sense of the story

• A jumbo mortgage is a home loan with an amount that exceeds conforming loan limits imposed by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy mortgages from lenders. The conforming loan limit is $417,000 in most parts of the United States, but is $625,500 in the highest-cost areas, which includes California.

• During the mortgage crisis, the vast majority of jumbos were adjustable-rate mortgages and hybrid adjustable-rate mortgages, which started at low fixed rates and switched to adjustable interest rates at the end of a set time period – typically of five, seven, or 10 years.

• With the renewal of the secondary market for jumbo mortgages, more lenders today are willing to offer fixed-rates. Packaging the loans into mortgage-backed securities that are sold to investors can lessen the risk to lenders.

• While interest rates for jumbo mortgages are significantly lower than a year ago, hybrid ARMs remain attractive to borrowers with other financial priorities.

• The general wisdom when deciding between an ARM and a fixed jumbo is the same as with any mortgage. Borrowers should consider the length of time they plan to live in the house. If the length of time is near or less than the length of the ARM, then borrowers will save money with the ARM.

• Still, borrowers should keep in mind that some lenders will push hybrid ARMs because the lender stands to reap a higher return on investment. Additionally, lower ARM interest rates and monthly payments can free up cash to purchase stocks and other assets.