The combined loan to values (CLTVs) on current loans are worse than many realize, according to a study by Equifax Capital Markets.
Equifax provides borrower and property value information to lenders and investors.
The average CLTV, a ratio used to determine the risk of default when more than one loan is used, for current Alt-A loans ballooned from 75% in July 2005 to 107% in July 2009, according to the study. Home price declines and an increase in the popularity and size of second liens caused the rise, analysts reported.
The percentage of borrowers holding a second lien with a current Alt-A loan increased to 25% in July 2009 from 10% in July 2005, according to the study.
While home prices have gained the spotlight, the increased prevalence of second liens has quietly grown. As a result, mortgage market investors are still concerned about the impact of borrower equity as home price depreciation eases, according to the report.
Researches also found that Alt-A and prime borrowers have caught up to subprime borrowers in the utilization of their revolving credit lines. In July 2009, 22% of Alt-A borrowers with a current mortgage loan put to use 80% or more of their total credit, up from 10% in July 2005.
HELOCs, or a home equity line of credit, represented a significant portion of the borrowers’ revolving debt, according to the data. Specifically, 45% of prime borrowers and 33% of Alt-A borrowers with current and securitized mortgage loans had a HELOC in July.
Equifax analyzed the health of borrowers with non-agency securitized mortgages from Q305 to Q309 by studying borrower credit information, home price data from the Federal Housing Finance Agency (FHFA) and loan-level data. After isolating the population of non-agency securitized mortgages, Equifax statisticians studied the performance of the loans across vital default risk trends.
“As home prices moderate, comprehensive and up-to-date information on second liens, including whether they exist as well as their balance and payment status, will become more critical for investors to know in order to accurately value non-agency mortgage-backed securities and whole loans,” said Steve Albert, vice president of Equifax Capital Markets.