CONFIDENCE LEVELS ON COLLATERAL
CONFIDENCE LEVELS ON COLLATERAL
LTV is of course the usual measure of valuation of residential (especially owner occupied) collateral. LTV is of course only as good as the value assumption. When value is based entirely on comparative sales, the number may or may not be reliable. If there are MANY VERY SIMILAR AND VERY NEAR PROPERTIES that have sold recently for prices that are consistent each with the other, then the value suggested will probably be pretty accurate, ast least for the immediate future. If there are FEW PROPERTIES SIMILAR AND NEAR that have sold, comps are essentially useless.
Sufficiently low LTV levels for fair confidence for single owner occupied properties are generally accepted: 75% or 80% for desirable properties; 50% for marginally desirable properties; 0% for properties no one will ever buy. Of course if a Lender would be happy to pwn a property at a specific LYV level no further analysis is needed. That said a mortgage at even more than 100% of assumed current value is fo some, even appreciable, collateral value
The mathematics for evaluating collateral confidence levels on a portfolio of SEVERAL PROPERTIES is very difficult. Two basic propositions control: the more parcels of collateral the better; however ONE property at 70% LTV first mortgage is about the same as FOUR properties at 85% LTV and some LARGE NUMBER of properties at 100% or greater LYV. Basically individual LTV on first mortgages is more important than the number of pieces fo collateral. I had a loan were I had EIGHT pieces of collateral and only got paid off while foreclosing the LAST ONE!!
If property is income producing and at highest and best value usage then NOI and CAP RATE are generally better indicators both of individual property values, the value of individual properties as collateral (especially for junior mortgages!!!), and most significantly the collateral value of a portfolio or group of properties.
LOW INTEREST RATES ON SENIOR MORTGAGES EAT UP A SMALLER PERCENTAGE OF NOI THAN HIGH INTEREST RATES.
Thus, there is MORE DEBT COVERAGE PER DOLLAR OF LOAN when making a junior mortgage loan junior to a low interest rate first mortgage. In fact if the interest rate is so low as to be disregarded (almost the case in some first mortgages today!!!!) the AMOUNT OF THE FIRST MORTGAGE CAN BE DEDUCTED FROM THE VALUE OF THE PROPERTY FOR LTV CALCULATION PURPOSES.
This is more easily understood by looking at the net NOI remaining after first position loan servicing. If there is some large amount of NOI remaining to service a blanket junior mortgage on a large number of properties, the loan is a good one even at LTV's greater than 100%!!!!
The obvious rule of thumb is that if a Borrower is putting a meaningful amount of money in his pocket every month from the collateral after paying all obligations he will probably be reluctant to walk away (and a Lender should be happy if he does!!!!)
pl goduti