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What is Driving the Decline in LTV Ratios?

The effective interest rate on mortgage loans guaranteed by Fannie Mae or Freddie Mac bumped up from 3.72 percent to 3.73 percent from August to September, according to the FHFA’s monthly mortgage interest rates report for September 2016 [1].

The average interest rate on all mortgages backed by the GSEs rose slightly from August to September, from 3.59 to 3.60 percent. The slight increase was largely driven by an increase of 4 basis points on the mortgage rates for previously occupied homes, up to 3.78 percent. Meanwhile, the effective rates on newly constructed homes declined by 10 basis points, down to 3.58 percent.

Newly constructed homes were largely responsible for September's over-the-month decline in LTV ratio on GSE-backed loans, according to the National Association of Home Builders (NAHB) [2]. The average LTV dropped from 80.1 percent down to 79.9 percent, according to FHFA.

“The decline in the LTV ratio on all homes largely reflected a drop in the ratio for newly built homes,” said Michael Neal, Senior Economist with NAHB. “Over the month, the LTV ratio on newly built homes dropped to 78.1 percent from 78.8 percent in August while the LTV ratio on previously occupied homes remained basically unchanged, dipping slightly to 80.4 percent from 80.5 percent.”

The yearly trends for both mortgage rates and LTV ratios have been opposite of what they were from August to September, however.  Mortgage rates on GSE-backed loans have largely trended downward in 2016; overall rates declined by 37 basis points between the end of 2015 and September 2016, and effective rates on newly-build homes and previously occupied homes have fallen by 45 basis points and 36 basis points, respectively, according to NAHB.

LTV ratios on all homes have been trending upward despite the over-the-month decline in September; since January 2016, that ratio has risen by 3 percentage points from 76.9 percent up to 79.9 percent. According to NAHB, the increase in LTV ratio over the last nine months reflects an upward trend in LTV ratio for previously occupied homes, which increased from 76.7 percent in January up to 80.4 percent by September. The LTV ratio on newly-built homes experienced some volatility, but September’s ratio (78.1 percent) was the same as December 2015’s ratio.

Click here [1] to see the FHFA’s full report.