LTV Reduction Is Credit Positive for Japan Housing Finance Agency’s New Loans

LTV Reduction Is Credit Positive for Japan Housing Finance Agency’s New Loans

On 13 January, the Japan Housing Finance Agency (JHF, Aa3 stable), a governmental financial institution that specializes in mortgage loans, announced a change to its loan-to-value (LTV) criteria for Flat 35 loans, its dominant mortgage product. If approved when the government passes its fiscal 2012 budget, the change will go into effect on mortgages applied for after 1 April. The maximum LTV will decline to 90% from 100%, which will be credit positive for JHF’s new loans by lowering defaults.

The new LTV will not apply to refinancings. It also will not apply to loans for energy-efficient residences until the end of the government’s economic stimulus plan in the fiscal 2011 third supplemental budget.

Fewer defaults. The greater the homeowner’s down payment, the less likely a homeowner is to default. As such, an LTV describes an obligor’s equity ratio. Unless borrowers can obtain supplementary funding for their down payments from other lenders, obligors with LTVs of 90% will need to use their savings to fund larger down payments and thus will have a strong incentive to avoid default.

LTV is an especially important criterion for JHF. Unlike private lenders, JHF cannot deny mortgage loans to obligors with poorer credit because of its mandate as a government institution to provide mortgages to a broad range of consumers. JHF must approve loan applications that satisfy origination criteria that often reflect government policy. In contrast, private lenders rely much less on LTV as an underwriting criterion than on the credit quality of obligors because personal credit quality is the primary driver of defaults in Japan. Some lenders extend loans with LTVs of up to 100% depending on attributes such as an obligor’s debt-to-income ratio and qualitative criteria such as stability of employment.

Thwarting aggressive real estate agents. An LTV of 90% or lower also can lower riskier obligors created by aggressive real estate agents. In Japan, lenders often originate loans through real estate agents. Some real estate agents with high sales quotas have used unethical methods to gain customers, engaging in high-pressure sales and taking advantage of lenders whose screening criteria were not stringent. They have targeted riskier obligors whose applications had already been denied by other lenders. Those obligors typically do not have the ability to make a down payment. If a down payment is necessary under the LTV criteria of 90% or lower, the agents cannot recommend the lender to the obligor. Therefore, the lower LTV can exclude riskier obligors.

Dominant mortgage product. Flat 35 is one of the most popular products in Japan’s mortgage market, with a 35-year fixed interest rate. JHF increased the maximum LTV to 100% from 90% in 2009 as part of the government’s economic stimulus package.
The government established JHF on 1 April 2007 as successor to the Government Housing Loan Corporation. JHF’s main business is facilitating the stable supply of long-term, fixed-rate housing loans in Japan through its securitization support business.