The LTV Crunch

This is part Two in a Four part series of articles detailing the changing mortgage market.

The LTV CRUNCH

L.T.V. is simply an acronym for Loan to Value.
This is a surprisingly simple computation resulting in a percentage.

Let's assume you have bought a home valued at $800,000.
To buy that home you took out a loan for $640,000.
Your LTV is going to be 80% - easy right?
We took the loan amount and divided it by the value.

LTV has a cousin. CLTV - the C standing for "Combined".
That brings the other loans you might have into the equation, loans tied to the property like a Line of Credit.

Using our example, let's now assume you have a 1st Mortgage of $640,000 and a HELOC (Home Equity Line of Credit) for $80,000.
Now you owe $720,000 on your $800,000 home.
That's a CLTV of 90% right? Following so far?
Pretty easy stuff.
Now we're going to twist it a bit.

The Maximum LTV or CLTV is determined by the Guidelines.
The Guidelines are a set of rules detailing all the parameters of what loans the lender will do.

"Who cares what the Guidelines say?"
For one, the Underwriter who approves your loan does.
Underwriters live by the Guidelines.
To paraphrase the heavy metal band "Faith No More" They care a lot!

And to make matters worse, I have news for you. The Guidelines are changing.
They are getting tighter and tighter.
A year ago, a typical Guideline might have said something akin to "The maximum LTV on this product is 80% with a maximum CLTV of 100%"
To a loan officer that means this program will allow an 80% first mortgage and a 20% second.

That was then - this is now.

That same text might have a completely different tone today.
"The maximum LTV on this product is 80% with a maximum CLTV of 90%".

That doesn't sound so bad does it?

But wait there's more! (one of my favorite infomercial lines)

The value on your home is determined by the sales price of others around it.
That's called the Comparison Approach of Appraisal.
This is an important concept.

Going back to our example.
Your home was valued at $800,000 and you had a CLTV of 90%.
Let's now assume you need to refinance.
Your present loan is about to recast and your payment is going to go up.

The appraiser comes in, does his thing, and comes back with a value of only $750,000!
Why?
The other homes in your area that have sold in the last 3 to 6 months, sold for less. That's why.
Your home value is a direct result of the recent sales prices of other like homes in your area.

Important Concept #2:
As the value of your home decreases, your LTV increases.
Conversely, if your home value increases - your LTV decreases.

But I digress, let's go back to your refinance.
The appraisal comes back at $750,000 and now your CLTV is not the 90% it was but instead it's 96%. The aforementioned Guidelines for the loan that you are applying to clearly state a Maximum CLTV of 95% or worse yet 90%.

The result? - You cannot qualify for that loan and must find another loan program, another alternative, or live with it. This is because of two things. The guidelines changed, and foreclosures and financially distressed homeowners in your area have lowered the value of your home by selling at prices lower than your market value. Both items clearly outside of your control.

The Moral of the Story:
What's going on around you, in the country and in your neighborhood, no matter what your personal financial situation might be, can have drastic implications on you and your financial situation.

I am an optimist. I look at this as an opportunity for those that are prepared to rise above.
I have been recommending to all my past clients to review their mortgage plans, examine their goals and needs, and make adjustments to those plans sooner than later, if need be.