The impact of loan-to-value on the default rate of residential mortgage-backed securities

Luis Otero González, Pablo Durán Santomil, Milagros Vivel Búa and Rubén Lado Sestayo

Journal of Credit Risk

Abstract: ABSTRACT This paper analyzes the validity of using the loan-to-value (LTV) ratio to explain the;behavior of mortgage borrowers at an empirical level. To perform this analysis we use;data for mortgage loan portfolios securitized in Spain during the period 2005-8. In;the regression models developed, we find that higher initial LTV ratios are associated;with greater default risk. The relation between the probability of default and LTV;seems to be nonlinear, and a sharp increase is seen for values greater than 80%.;Our findings confirm the adequacy of the new Basel III proposal that sets nonlinear;capital requirement levels for banks holding residential mortgage loans at different;LTV ratios. However, the significance shown in the regression models estimated with;the "seasoning" variable could be considered in order to improve the models used to;measure capital requirements.

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