High-Loan-to-Value Lending:

Information on Loans Exceeding Home Value

GGD-98-169: Published: Aug 13, 1998. Publicly Released: Sep 14, 1998.

Additional Materials:


Thomas J. McCool
(202) 512-8678


Office of Public Affairs
(202) 512-4800

Pursuant to a congressional request, GAO provided information on high-loan-to-value (HLTV) loans, focusing on the: (1) characteristics of HLTV loans; (2) major organizations that provided HLTV lending; (3) volume of HLTV lending in 1995, 1996, and 1997, and the expected volume in 1998; and (4) benefits and risks of HLTV lending for borrowers, lenders, investors, and regulated depository institutions.

GAO noted that: (1) HLTV loans are considered hybrid loans because they have characteristics of both mortgage loans and unsecured consumer loans; (2) like mortgages, HLTV loans are secured by a lien on a house; (3) however, the lien itself may have less financial value than the amount of the loan in the event of a borrower's defaulting since the value of the HLTV loan and the original mortgage may exceed the value of the house; (4) thus, as with unsecured consumer loans, HLTV lenders rely more heavily on borrowers' creditworthiness; (5) according to industry officials, most borrowers use HLTV loans primarily to consolidate credit card debt or make home improvements; (6) while comprehensive industry data were not available, data provided by a lender responsible for about one-third of HLTV lending showed that, in 1997, HLTV loans averaged about $30,000; (7) the data also showed that the average contract interest rate was between 13 and 14 percent, with an average loan term of 25 years; (8) according to industry officials and GAO's review of the limited available industry data, from 1995 to 1997, HLTV loans were made or managed primarily by 10 institutions; (9) according to public- and private-sector officials, regulated depository institutions were not heavily involved in originating HLTV loans; (10) the involvement of these institutions would be important to any assessment of the potential exposure of federal deposit insurance funds to defaults of HLTV loans; (11) data indicate that HLTV lending has grown since its introduction in 1995 but remains small relative to other consumer lending; (12) data on the volume of HLTV loans were limited to those loans that were subsequently packaged into loan pools used to back securities sold to investors; (13) the volume of securitized HLTV lending has more than doubled from year to year from 1995 through 1997; (14) industry and securities firm representatives expected HLTV lending to increase again in 1998 to $12 billion or higher; (15) public- and private-sector officials pointed to several benefits and risks associated with HLTV lending to the borrower, lender, and investors; (16) while lenders and investors have benefited from the high rate of return on these loans, it is uncertain how these loans would perform during any future economic downturn; (17) if defaults were to increase, the rate of return would decrease; and (18) officials representing the two largest government-sponsored enterprises did not believe that HLTV lending posed greater risks to their portfolios than the existing credit card lending that the HLTV lending generally refinances.

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