We have a mortgage product that we call 80/20 loans. We take two mortgages simultaneously: a first mortgage for 80% of the sales price and a second mortgage for the remaining 20% of the sales price. Our loan policy states that loans with a loan-to-value (LTV) ratio greater than 80% are exception loans. For an 80/20 origination, should we treat both loans as exception loans, or only the second loan?

Interagency lending guidance strongly suggests that in most cases, the 20% second loans should be treated as exception loans.

The Interagency Guidelines for Real Estate Lending require banks to “[e]stablish review and approval procedures for exception loans, including loans with loan-to-value percentages in excess of supervisory limits.” For residential mortgage loans, there is no supervisory limit, but the guidance suggests that additional precautions should be taken for loans with an LTV ratio over 90% if secured by owner-occupied, 1-to-4 family homes. For mortgage loans secured by other types of property, an 85% supervisory limit would apply.

Your bank has adopted a lower LTV ratio limit of 80% for purposes of identifying exception loans, but your policy does not specify how to calculate the LTV ratio. For purposes of the Interagency Guidelines, the LTV ratio is defined to include “all senior liens” on the property securing the loan, divided by the property value. Applying this definition to the second loan would require the inclusion of both the 20% lien and the 80% senior lien — likely resulting in a LTV ratio close to 100% (depending on the property value, which may differ from the sales price).

However, the same reasoning does not apply to the first loan, assuming that there are no other senior liens on the property securing the loan. If that is the case, we do not believe that the Interagency Guidelines or your internal loan policy would require you to treat the 80% first loan as an exception loan.

For resources related to our guidance, please see:

Interagency Guidelines for Real Estate Lending, 12 CFR 34, Appendix A (“. . . In particular, the institution’s policies on real estate lending should: . . . Establish prudent underwriting standards that are clear and measurable, including loan-to-value limits, that are consistent with these supervisory guidelines [and] Establish review and approval procedures for exception loans, including loans with loan-to-value percentages in excess of supervisory limits. . . .”)
Interagency Guidelines for Real Estate Lending, 12 CFR 34, Appendix A, Supervisory Loan-to-Value Limits (This chart establishes a supervisory LTV limit of 85% for the “Improved Property” loan category.)
Interagency Guidelines for Real Estate Lending, 12 CFR 34, Appendix A, Supervisory Loan-to-Value Limits, Note 2 (“A loan-to-value limit has not been established for permanent mortgage or home equity loans on owner-occupied, 1- to 4-family residential property. However, for any such loan with a loan-to-value ratio that equals or exceeds 90 percent at origination, an institution should require appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral.”)
Interagency Guidelines for Real Estate Lending, 12 CFR 34, Appendix A, Definitions (“Loan-to-value or loan-to-value ratio means the percentage or ratio that is derived at the time of loan origination by dividing an extension of credit by the total value of the property(ies) securing or being improved by the extension of credit plus the amount of any readily marketable collateral and other acceptable collateral that secures the extension of credit. The total amount of all senior liens on or interests in such property(ies) should be included in determining the loan-to-value ratio. . . .”)