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.

Loan Modifcation - Red Flag!

Avoiding loan-modification hoaxes
Homeowners wary of being taken in by bogus “loan modification specialists” should not assume that a law office is the most reliable way to work with their lender.  Consumer advocates say a growing number of fraudulent modification services involve lawyers, or people who say they are lawyers.

Making sense of the story

• Increasingly, lawyers are lending “their names, their offices, their credentials” to fraudulent operations that vaunt superior skills in obtaining loan modifications, according to a senior counselor at the Lawyers’ Committee for Civil Rights Under Law in Washington.

• While Federal Trade Commission rules generally prohibit demanding upfront fees for mortgage relief services, there is a narrow exception for lawyers.

• Under the rules, a lawyer may charge clients in advance for assistance if the service is part of their general practice of law, and not outside of that practice.

• Certainly, many lawyers provide legitimate foreclosure-avoidance services, but borrowers should know that when going to a lawyer whose sole business is loan modifications, that is a red flag.

• As more homeowners become aware of these tactics, some operations are changing their practices.  Instead of selling loan modification services, they are advertising so-called loan workouts and forensic loan audits. Some are even posing as nonprofit groups.

• The Homeownership Preservation Foundation and the Lawyers’ Committee both belong to a coalition of public and private agencies that maintain a national database of loan-modification complaints.  Since March 2010, some 28,000 homeowners have reported potential fraud.  Their reported monetary losses total around $66 million.

• Counseling services offered by the Dept. of Housing and Urban Development are free of charge.  Visit http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm to find a HUD-approved counselor.

www.RealtorLisaWu.com