Summary: A segment of the financial services industry has since 1995 offered loans that are tied to the value of a borrower's house but that, in combination with preexisting first mortgages, exceed this value. The loans, referred to as high-loan-to-value (HLTV) loans, can reach 125 percent or even more of a home's value. As with unsecured consumer loans, HLTV lenders rely more heavily on borrowers' creditworthiness in making loans. Most borrowers use HLTV loans to consolidate credit card debt, according to industry officials. Some borrowers also use the loans to make home improvements. Data provided by a lender responsible for about one-third of HLTV lending showed that such loans averaged about $30,000 in 1997. The average interest rate for these loans was between 13 and 14 percent, with an average loan term of 25 years. GAO found that HLTV loans were made or managed primarily by 10 institutions. Regulated depository institutions were not heavily involved in originating HLTV loans. The involvement of these institutions would be important to any assessment of the potential exposure of federal deposit insurance funds to defaults of HLTV loans. Available data indicate that HLTV lending has grown since its introduction in 1995 but that it remains small relative to other consumer lending. Industry representatives expect HLTV volume to reach at least $12 billion in 1998, a fraction of the $3.8 trillion in outstanding residential mortgage debt. This report also discusses the benefits and risks associated with HLTV lending to the borrower, lender, and investors.
