Magazine article American Banker

High-LTV Lending A Force for Economic Stability, Study Says

Magazine article American Banker

High-LTV Lending A Force for Economic Stability, Study Says

Article excerpt

High-loan-to-value lending is less risky than it appears, according to a newly released study.

What's more, the economy as a whole is more stable because of high-LTV lending, which should not be viewed as a "sleazy" or "reckless" activity, according to "High Loan to Value Lending: Problem or Cure?"

The study, sponsored by the American Enterprise Institute for Public Policy Research, was presented Wednesday in Washington by Charles W. Calomiris, a professor at Columbia University's Graduate School of Business.

Banks have increasingly been making the controversial loans, which let homeowners borrow up to 150% of the value of their homes. Many use the money to pay off credit card debt.

In recent weeks, the Office of Thrift Supervision has said it will review the popular product, in part because of fears it is encouraging people to load up on debt.

The study, done by two professors from the Columbia University Graduate School of Business, high-LTV lending has evolved to "compensate for the deficiencies of the consumer bankruptcy law by making it possible for consumers to commit" themselves credibly "not to voluntarily default on debt."

Because these loans have lower interest rates, and are collateralized by a person's house, the study said, they are less likely to go into default. And they are a claim on an asset that would be protected, otherwise, from seizure by creditors if a borrower did default.

"The movement from other credit (like credit card debt) into high-LTV reduces both leverage and default risks," the study says. …

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