That was the message a prominent consultant on home equity lending delivered last week to officials of the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. The Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. buy loans backed by up to 80% of a property's worth. But since the end of the refinancing boom last year, lenders have been increasingly making loans, especially second mortgages, backed by up to 100% of the property's value. The consultant, David Olson of Columbia, Md., said he was invited by regulators to "provide more meat" to back up Comptroller Eugene Ludwig's recent warnings that mortgage credit quality was slipping at some banks. Mr. Olson's briefing provides further evidence that concern over making mortgages at high loan-to-value ratios continues to simmer at both regulatory agencies. Mr. Olson is a member of a growing chorus of industry observers and lenders who have voiced concern over high LTV lending. They say that the proliferation of loans with over 80% LTV is increasing foreclosures and delinquencies. Duff & Phelps Credit Rating Co., Leland Brendsel, chairman and chief executive of Freddie Mac, and Patrick Lawler, chief economist, Office of Federal Housing Enterprise Oversight, have all expressed concern recently about high-LTV lending. Mr. Olson told regulators that the growth in high-LTV lending is a serious problem that needs to be addressed. He said delinquencies and foreclosures were beginning to creep up as underwriting quality has deteriorated. "Someone is going to eat a loss," he said. "I don't know who, but someone will." He said told regulators that an increase in originations with reduced documentation, mortgages to borrowers with damaged credit, and the surging popularity of second mortgages with 100% LTVs are also sabotaging credit quality.
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