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High-LTV Lending Dominates FHA & VA Programs

applicationAt the end of 2014, Fannie Mae and Freddie Mac announced that they will begin allowing qualifying first-time borrowers to purchase homes with just a 3 percent down payment with the reintroduction of high LTV products. In addition, the Federal Housing Administration's (FHA) reduction in its annual mortgage insurance premiums earlier this year.

Despite these companies' decisions, high loan-to-value (LTV) products (greater than 95 percent LTV) are still in high demand, especially among the FHA and Department of Veteran Affairs (VA), who occupy a large portion of the mortgage market, Black Knight Financial Services, Inc., latest Mortgage Monitor Report found.

Black Knight Data & Analytics SVP Ben Graboske noted that this phenomenon is interested due to "how heavily this market is dominated by FHA/VA."

He added, "Back in 2007, the GSEs made up over 45 percent of high-LTV purchase originations, while FHA/VA lending made up roughly one-third. Since 2009, FHA/VA products have made up over 90 percent of high-LTV purchase originations every year, and the same is true in 2015, even with the GSEs having reintroduced their own 97 percent LTV products. In fact, those products have accounted for less than 3 percent of all high-LTV originations so far this year."

bAccording to the report, high LTV purchase originations rose 20 percent in the third quarter of 2015, compared to the 13 percent increase in the purchase market overall.

The greatest increase in purchase originations was recorded in >95 percent LTV lending, which holds 23 percent of the overall purchase market.

A key driver high LTV purchase origination growth is the spike in high credit lending, as the average score on a high LTV FHA/VA loan is up six points from last year at 706 in the third quarter, Black Knight found.

In addition, the average credit score for all high LTV purchase loans also rose from 702 to 708 in the last year.

The high LTV loans market remains mostly within FHA/VA lending, especially among lower credit score groups. However, the report showed that there have been annual declines in high LTV lending among 620-660 credit scores even though overall high LTV lending has increased.

"This may be attributed to tightening credit, or it may be that the FHA’s reduced annual mortgage insurance–which FHA estimates will reduce borrowers’ mortgage payments by $900 per year–has enticed some higher-credit borrowers into those FHA products," Graboske said.

Click here to view the full report.

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