According to lenders, borrowers have used HLTV loans primarily to consolidate credit card debt or to make home improvements. HLTV Loans Are Hybrid Loans

HLTV loans have characteristics of both mortgage loans and unsecured consumer loans. According to FirstPlus officials, the average HLTV loan they made in 1997 was for about $30,000 with a 25-year term. Also, in the same year, FirstPlus charged an average contract interest rate of 13 to 14 percent on its HLTV loans, but any origination fees or “points charged” would raise the effective interest rate of the loan. According to interviews with numerous industry officials and our review of limited available industry data, 10 institutions have collectively led the HLTV market since 1995. According to public and private sector officials, regulated depository institutions were not heavily involved in originating HLTV loans from 1995 to 1997. The degree of involvement of these institutions would be important to assess any potential exposure of federal deposit insurance funds to defaults on HLTV loans. HLTV Lending Is Growing but Still Represents Only a Small Percentage of the Total Mortgage and Unsecured Lending Markets

Data on the volume of HLTV loans are limited to those loans that were subsequently sold to investors as securities. According to private sector officials, the total securitized volume of HLTV lending has more than doubled from year to year from 1995, the year it was introduced, through 1997. The officials also expected total securitized HLTV lending to increase in 1998, with estimates of total volume of $12 billion or higher. However, based on the characteristics of the loans and available performance data on HLTV loans, public and private sector officials identified many inherent trade-offs between the benefits and the risks associated with HLTV lending that face borrowers, lenders, and investors. Limited Data Available to Identify Losses on HLTV Loans

Public and private sector officials told us that data on losses from HLTV loans experienced by institutions making loans were limited for a variety of reasons, such as that the loans (1) were a recent lending practice adopted in 1995 (and losses are usually experienced over longer periods of time); (2) were offered during a period of strong economic growth; and (3) were not specifically tracked by regulators because HLTV loans were generally made by unregulated, nondepository institutions. The combined value of the HLTV loan and first mortgage often exceeds the value of the house. Officials representing securities firms also noted several ways in which the lenders would retain some risk. Our objectives were to provide information regarding (1) the characteristics of HLTV loans; (2) the major organizations that provided HLTV lending; (3) the volume of HLTV lending in 1995, 1996, and 1997, and the expected volume in 1998; and (4) the benefits and risks of HLTV lending for borrowers, lenders, investors, and regulated depository institutions. We did not independently verify this industry data.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on high-loan-to-value (HLTV) loans, focusing on the: (1) characteristics of HLTV loans; (2) major organizations that provided HLTV lending; (3) volume of HLTV lending in 1995, 1996, and 1997, and the expected volume in 1998; and (4) benefits and risks of HLTV lending for borrowers, lenders, investors, and regulated depository institutions.

What GAO Found

GAO noted that: (1) HLTV loans are considered hybrid loans because they have characteristics of both mortgage loans and unsecured consumer loans; (2) like mortgages, HLTV loans are secured by a lien on a house; (3) however, the lien itself may have less financial value than the amount of the loan in the event of a borrower's defaulting since the value of the HLTV loan and the original mortgage may exceed the value of the house; (4) thus, as with unsecured consumer loans, HLTV lenders rely more heavily on borrowers' creditworthiness; (5) according to industry officials, most borrowers use HLTV loans primarily to consolidate credit card debt or make home improvements; (6) while comprehensive industry data were not available, data provided by a lender responsible for about one-third of HLTV lending showed that, in 1997, HLTV loans averaged about $30,000; (7) the data also showed that the average contract interest rate was between 13 and 14 percent, with an average loan term of 25 years; (8) according to industry officials and GAO's review of the limited available industry data, from 1995 to 1997, HLTV loans were made or managed primarily by 10 institutions; (9) according to public- and private-sector officials, regulated depository institutions were not heavily involved in originating HLTV loans; (10) 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; (11) data indicate that HLTV lending has grown since its introduction in 1995 but remains small relative to other consumer lending; (12) data on the volume of HLTV loans were limited to those loans that were subsequently packaged into loan pools used to back securities sold to investors; (13) the volume of securitized HLTV lending has more than doubled from year to year from 1995 through 1997; (14) industry and securities firm representatives expected HLTV lending to increase again in 1998 to $12 billion or higher; (15) public- and private-sector officials pointed to several benefits and risks associated with HLTV lending to the borrower, lender, and investors; (16) while lenders and investors have benefited from the high rate of return on these loans, it is uncertain how these loans would perform during any future economic downturn; (17) if defaults were to increase, the rate of return would decrease; and (18) officials representing the two largest government-sponsored enterprises did not believe that HLTV lending posed greater risks to their portfolios than the existing credit card lending that the HLTV lending generally refinances.