By Charles W. Calomiris
The authors weigh the features of this undefined, its practices and rules, and the altering nature of the shopper finance industry to figure out even if restricting such lending might serve the general public curiosity.
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Additional info for High Loan-to-Value Mortgage Lending: Problem or Cure? (Aei Studies on Financial Market Deregulation)
Prepayment risk tends to be lower for HLTV mortgage loans than for conforming A credits. Jeff Moore, president, Mego Mortgage (Atlanta), maintains that ‘‘because the borrower ends up with a loan-to-value on the property in excess of 100 percent, they usually stay in the loan for some time because they can’t quickly refinance out and they still have relatively high debt ratios’’ (Hewitt 1997, 177). Investors have been satisfied with the general performance of HLTV loan securitizations largely because the model risk has been treated rather conservatively and credit enhancements protecting asset-backed securities holders have consequently been more than adequate.
To demonstrate expected performance for its first securitizations—which were also the first HLTV loans ever securitized—FirstPlus relied extensively on Title I performance data. According to Dan Phillips, chief executive officer of FirstPlus, ‘‘that’s how we got the rating agencies to rate the loans, and the insurers to insure them’’ (Timmons 1996). Investors and underwriters have far more performance data with HLTVs now than in late 1994, when Phillips’s first securitization went to market, but performance expectations are still treated gingerly by rating agencies since longterm behavior is relatively unknown (Fitch IBCA 1998b, 6).
HLTV lenders charge lower interest rates on their credits, as noted, because they believe that linking debt to the consumer’s home discourages voluntary default. Credit card loans do not enjoy that same protection. Some skeptics maintain that HLTV borrowers start out looking sound but are prone to subprime default characteristics later because of poor credit habits and the high LTV leverage. Although the HLTV market has not yet been tested through a cyclical downturn, this assessment is questionable.
High Loan-to-Value Mortgage Lending: Problem or Cure? (Aei Studies on Financial Market Deregulation) by Charles W. Calomiris