This setup generated a total of 12,648 unique syntheticrnloans. For each loan,rnthe authors then generated monthly recordsrnfor seven years following origination. This resultedrnin a total of 1,062,432 loan‐month records.</p

The outcomes of interestrnare the predicted seven‐year cumulative foreclosure completion rate andrnthe predicted seven‐year cumulative 90‐day delinquency rate. rnThe focus however was on the former; findings on the 90-day delinquency raternare covered only briefly in this summary.</p

Thernseven-year time span was selected because loan terminations in that timernspan are more likely due to underwriting variables than other triggerrnevents. It becomes increasingly difficult to tease out otherrnconfounding factorsrnin older loans and cumulative rates tend to taper off or flattenrnbeyond 7 years.rnThe measure of delinquency and foreclosurerncompletion used in the study representsrnthe cumulative or lifetimernprobability of a loan becomingrndelinquent (or reaching foreclosure completion).</p

The first finding was that, for both GSErnand FHA segments, as the original LTV increases (with borrower FICO andrnfront-end DTI held constant at 620 and 31 respectively), the lifetimernforeclosure rate rises monotonically. rnFor the GSE loans in the table below, for example, as the original LTV increasesrnfrom 70 to 100, the foreclosure rate climbs progressively from 5.66 percent to 19.77 percent. GSE borrowersrnappear to have a higher foreclosure rate compared to borrowers in the FHA market segmentrnwith the same original LTVrnbut this is an artifact of usingrndifferent foreclosure measures between the two market segments.</p

In the secondrncolumn of each panel foreclosure rate changesrnare presented in ratio format, where the resultsrnare shown relativernto the baseline foreclosure rate for loans with 80 percentrnLTV at loan origination. The Exhibit indicates that, for example,rnthe foreclosure rate is 9.20 percentrnfor a GSE loan with 80 percentrnLTV. If the same loan was underwritten with 90 percent LTV, the foreclosure rate would be 1.48 times the baseline level. rnApparently the LTV‐ foreclosure rate relationship is nonlinear, especially for the FHA segment.rnWhen the originalrnLTV is changed from 80 to 70, the foreclosure rate would be 0.72 times the baselinernlevel. However, if we adjustrnthe original LTV by the same increment in the otherrndirection – from 80 to 90, the foreclosure rate would be 1.62 times the baseline level.  This seems to indicate that foreclosure rates are more sensitive or responsive to LTV changesrnin the FHA than in the GSE segmentrnof the market.</p

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Exhibit 3 repeatsrnthe same analysis, separately, for borrowers with four FICO score levels: 620, 660, 700, and 740rnwith a constant DTI ration of 31 percent. rnBy holding LTV constant, borrowers with a lower FICO score are associated with a higher foreclosure rate.  When expressed as a multiplernof the baseline rate, the foreclosure rate grows steadily with LTV in each FICO class.  These relationships hold for both GSE and FHArnsegments.</p

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As a multiple of the baselinernrate the rate of foreclosure growsrnsimilarly for the four FICO brackets.rnThis nonetheless does not mean that the growthrnin the foreclosure rate is the same across the four FICO groupings. In fact, the absolute rate of foreclosure rises with LTV much more dramatically for borrowers with lower FICO scoresrnthan for borrowers with a higher FICO.rn</p

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As expected, acrossrnall LTV levels, borrowers with a higher DTI had a higher foreclosure rate. This is true across both marketrnsegments but the LTV-foreclosure rate relationship has a relativelyrnmodest sensitivity to the DTI level.  Therndramatic effects of the FICO score impactrnon the LTV‐foreclosure relationship are not observed here, howeverrnand this is true for both segmentsrnof the mortgage market.rn</p

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The authors similarly tested relationships with 90 dayrndelinquencies in the same manner as completed foreclosures.  Overall, they found that the LTV-delinquencyrnrate relationship is very much like the LTV‐ foreclosure rate relationship. As the originalrnLTV rises, the lifetimerndelinquency rate increases monotonically. This is true for both segments of the market and across FICO levels.  However they found that adjusting thernoriginal LTV generates a larger impact on foreclosure than delinquency for bothrnmarket segments.   

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