Average LTV inched down to a record low in 2Q

The average loan-to-value ratio for mortgages in the United States fell to its lowest point since at least 2010 during the second quarter, according to CoreLogic's most recent report on homeowner equity.

At 42%, the average LTV for mortgaged properties was down from 43% the previous quarter and 46% a year earlier, according to Selma Hepp, interim lead in CoreLogic's office of the chief economist at CoreLogic.

The series-record low may be reassuring for lenders and servicers in a cooling housing market, some of whom have been around long enough to remember declines in home equity and high LTVs contributed to massive deterioration in loan performance during the Great Recession.

Reinforcing research to date from other sources, CoreLogic's latest report suggests that low LTVs and other historically conservative forms of underwriting have been protecting loan performance as consumer costs rise and the housing market cools in this market cycle.

Mortgage companies prefer ratios above 80% so that borrowers have "skin in the game" and make efforts to repay loans or work out other alternative arrangements with their lenders rather than walking away from the homes that secure their financing in the event of distress.

A wave of so-called strategic defaults did occur during the last major housing downturn, which took place in a market where many loans had LTVs above 100% and were commonly made without full consideration of the ability to repay. The average LTV then was above 70% Hepp said.

"I think part of the reason why it's come down so much is that people are making larger down payments more so than they were before," Hepp said, referring to the Great Recession in her comparison.

Lenders still make mortgages with higher LTVs given that, even with some slight cooling in housing and relatively strong employment, affordability relative to wages is under strain; but as the low average ratio suggests, only a small share of mortgages exceeded home values in 2Q.

The share of mortgages with negative equity fell to 1.8% during the period, down 7% from the first quarter, and 18% compared to a year earlier.

At the other end of the scale, a growing share (59.1%) of mortgages had LTVs below 50% in the second quarter, up from 55.47% during the previous three-month period. Conversely, the percentage of LTVs in all buckets above 50% shrunk between the first and second quarter and the share in each category tends to decrease as leverage increases, with one exception: LTVs above 125%. However, the percentage in this category still is relatively low at 1.12%. CoreLogic may examine the causes of this trend in subsequent research.

Since the Great Recession loans trended toward lower LTVs. It hasn't solely been driven by underwriting, but also by the fact that rates, until recently, have been historically low.

The drop in LTVs accelerated in particular during the pandemic's period of extraordinarily low rates that preceded the recent inflation-driven uptick. In the first quarter of 2020, the average LTV was 10 percentage points higher at 52%, which illustrates the downward trend accelerated during the period. In comparison, it only fell two percentage points between the first quarter of 2018 and 1Q20.

While the national trend is encouraging, leaving the average borrower with $300,000 in home equity on average, Hepp noted that variation in state home prices could paint a different picture when it comes to LTVs in specific markets. That may play into some migration trends.

"People are moving out of the high cost areas. So if they cash [their equity] out and move to another state, that may be driving prices in some of these more affordable regions to which these households are moving to, potentially," she said.