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CFA Level I · CFA Level I Exam · Fixed-Income Securitization

A bank originates a residential mortgage with a loan-to-value ratio of 90% at origination. Relative to a similar mortgage with a loan-to-value ratio of 60%, the 90% loan is most likely to:

A 90% loan-to-value mortgage is riskier than a 60% one because the borrower has less equity and the lender has a thinner cushion against falling property prices. It is therefore more likely to require mortgage insurance or be priced at a higher interest rate.

  1. Ahave a lower credit risk because the borrower holds more equity
  2. Bbe more likely to need mortgage insurance or carry a higher rateCorrect
  3. Chave a lower probability of default because the property secures it

Explanation

A higher LTV means the borrower has less equity and the lender has less cushion if property values fall, so default and loss severity risk are higher. Lenders typically compensate through mortgage insurance requirements or higher rates. The claims about lower credit risk are reversed.

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