You better tell the people who make a living out of assigning credit ratings to RMBS notes.
LTV is also a factor in RWA calculations, which is a pretty important value to banks.
I don't disagree I am suggesting there is a business aspect to it rather than just risk. There are more factors that go into an RMBS than LTV, my experience with RMBS is in the US Market, I didn't realize there was a large European RMBS business.
The RWA calc also considers the PD, so the difference of 50k is nominal. For instance AIB has mortgage portfolio of 32.3 billion (25K loans) of which they set aside 0.7bln (2.2%) of the portfolio, and 28k per loan, and mortgages with LTV > 80% is about 6bln. I note that only 14% of loans are fixed rate, I would guess that this accounts for most of the loans with LTVs > 80% as it indicates newer mortgages in which fixed rates have been lower than variable.
Eh, they’re vastly different.
An 80% LTV has 100% more equity than a 90% LTV.
To you and me it is but in terms of the overall bank it is not under their loss modelling approaches (regulatory)
Hi Andrew
If you take out a 90% mortgage, a 10% fall in house prices will wipe out your equity. History shows that people in negative equity are less likely to keep up their payments.
If you take out an 80% mortgage, you will still be in positive equity with a 10% fall in house prices.
The data show that there is very little default and very low losses arising from default for mortgages below 80% LTV. It starts to rise fairly sharply at 80% and increases as it exceeds 90%.
The Central Bank has issued a number of studies on it.
Brendan
Brendan, don't believe everything you read, the biggest factor for me not paying my mortgage is if I lose my job, not if the house price drops. The banks are on IFRS9 impairment models to model expected loss, I don't know if they model a 10%, 20% house drop.
Banks lend at 10% deposit for first time buyers, 20% for second time buyers. For example if there are two people, a first time buyer and second time buyer, both work at the same place and have the same financial situation, credit rating etc. They should have the same probability of default, however if both default the bank has a higher probability of loss on the 90% loan than the 80% loan. That is why they calculate an ECL across the portfolio factoring in likely default rates of mortgage holders and they hold an amount in reserve accordingly. The lower the LTVs would reduce a portion of the loss amount they will have to hold, and they could lose less even if there is a higher amount default rates if their portfolio has lower LTV (assuming they repossess the house).
What we are talking about here is the rate of interest being charged on a loan, the persons ability to repay and their likelihood of default remains the same as before, the only difference is the bank now receives a smaller income on the loan.
It is like going into a shop and paying 50cent more for milk because you are under 30.
What I am driving at here, is this not unfair to first time buyers who have to borrow at 90%? It will take them x years to build enough equity to get a new rate. Is it not a case of the banks advertising low rates to get business but in reality they don't really want to give them? Afterall Banks have Return on Equity Targets. In the case above AIB has 6bln worth of loans earning a higher rate of interest than the current market rate.