Moody's Warns of High-LTV Loan Risk

Loans with high loan-to-value ratios are risky, and high-LTV pools will probably experience losses comparable to those of credit card pools, says a new report by Moody's Investors Service.High-LTV lenders have little margin for error because the loans have little or no equity protection, and therefore servicing is a critical element, according to Linda Stesney, a managing director in residential mortgage finance. As a result, lenders "are likely to suffer a complete loss if they make a mistake in assessing a borrower's credit quality and the borrower defaults," said Ms. Stesney, an author of the report. Despite the risks, lenders have been drawn to the high-LTV market by healthy margins, and Moody's estimated that high-LTV loans will hit $15 billion this year, nearly double 1997's total of about $8 billion. Moody's also said high-LTV lenders lack protections available to credit card lenders, such as credit line reductions and interest rate increases, and noted that high-LTV securitizations lack the early amortization trigger that allows investors to escape from a bad credit card deal within two years. Moreover, since they are longer-term assets than credit cards, high-LTV loans "are even more vulnerable to the 'four Ds of underwriting': downsizing, death, divorce, and disease," Moody's said. The Moody's website address is http://www.moodys.com.