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A high-ratio mortgage loan typically has a loan-to-value ratio of more than 80%.
Fannie Mae and Freddie Mac are required by their charters to purchase private mortgage insurance or one of two other seldom-used forms of credit enhancement on all loans with a loan-to-value ratio above 80%, Zimmerman said.
Borrowers also can request cancellation of the insurance when their loan-to-value ratios have been reduced by 20%.
The allocation of credit risk across mortgage holders, insurers, and purchasers depends on underlying assumptions about risk-mitigation activities, business relationships, loan-to-value ratio distributions, default rates, and loss severity rates.
This conversion process involved using loan-to-value ratio (LTV) distributions for each type of institution; estimating the extent of PMI use across institutions; applying historical default and loss severity rates by loan-to-value ratio for each type of institution; and reallocating these risk dollars across institutions to account for risk-sharing arrangements between insurers and other institutions.
For privately insured mortgages, we estimated that losses are divided 50-50 between the insurer and the insuree if the loan-to-value ratio is 90 percent or less and 60-40 if the loan-to-value ratio is greater than 90 percent.
Unless the mortgage carties PMI or some other form of credit enhancement, Fannie Mae and Freddie Mac generally purchase only mortgages with the lowest credit risk because they are restricted to purchasing mortgages with a loan-to-value ratio of 80 percent or less.
Thus, only rough comparisons are possible because we can observe only the income and race or ethnic group of the borrower and the location of the property and not key measures of creditworthiness such as the loan-to-value ratio, the credit history, or the debt-payment-to-income ratios.
Black and Hispanic mortgage applicants in Boston, on average, had larger debt burdens, higher loan-to-value ratios, and weaker credit histories, and in other respects did not fare as well according to the evaluation criteria used by mortgage lenders.
Most applicants, white as well as minority, exceed some guideline for obligation or loan-to-value ratios or credit history; or some possess a characteristic that requires additional documentation, such as self-employment or the fact that they are purchasing a two- to four-family home.