As housing prices continue to slide, the loan-to-value ratios of always-performing loans have in many cases crept higher than those on defaulted loans, according to a new report from Moody's Investors Service.
Based on previous trends, analysts at Moody's predict that the strategic default risk is increasing among borrowers who have been regularly making their mortgage payments on time.
Throughout the housing crisis, studies have shown that a high LTV ratio is a strong predictor of a borrower's likelihood to default. Until now, defaulted loans have tended to have much higher LTVs than performing loans.
According to Moody's, between 12% and 24% of always-performing loans have higher and faster-rising LTV ratios than those of already defaulted loans, depending on asset type. As such, there could be an increase in strategic defaults among borrowers with these high LTV loans.
Setting the stage for the potential increase in defaults is the rising number of deeply underwater borrowers. According to Moody's, since mid-2010 the average home price for always-performing loans originated since 2005 has been falling. This has resulted in loans with rising LTVs that are close to or that exceed the LTVs of loans that have defaulted since 2009.
If these borrowers fall more deeply underwater, they may decide that they are better off not making their mortgage payments, Moody's said in the report, which was issued earlier in the week.