Evening star., 1938-09-10
.[0AN-VA[UE RATIO
ALONE MISLEADING
F. n. A. Official Says Many
Factors Must Be Gauqed
for Acceptabi|ity.

Home mortgage selection methods
n which the ratio Of the mortgage
loan to the value Of the property b.
comes the sole test Of eligibility pro-
vide m inadequate measure Of the
risk involved in mortgage lending,
according to Frederick M. Babcock,
deputy administrator and director Of
the Federal Housing Administrat tion's
underwriting diviAon.
While loan-value ratios are one Of
the most important factors to be con-
stdered in rating mortgage loans, he
said. they should not be considered
aS the sole test Of worth. Mortgage
loan experience has not shown any
close correlation between high loan
value ratio mortgages and defaults.
indicating that other factors play an
equally important part in the trans
action.
Risk rating procedures adopted by
the F. H. A. for the insurance of home
mortgages have been devised to reflect
this experience and to give mortgage
loan-value ratios their proper place
as one factor in the risk rating proce-
dure. Under the F.. H, A. system the
capacity OF the borrower to repay his
obligations, the soundness Of the
physical structure, the character Of
the neighborhood, the conformance
OF the property to others in the neieh-
norhood and other similar factors as
sumo a role equal in Importance.
Each Phase Important.
Mortgage loans are extremely in
volved transactions, and any tendency
70 stress one phase of the problem at
the expense OF another is dangerous.
MI. Babcock said. "Lean-value ratios
oy themselves, do not provide lending
Institutions with an accurate basis for
approving or rejecting 4 loan propo-
sition.
1T Is obvious, for example. that
Oan-value ratios do not supnly an
answer to the question of whether the
borrower is capable OF repaying his
mortgage obligation, although they do
give one OF the clues with which tn
work. We have been forced to reject
many cases in which the loan repre-
sents only say 80 per cent Of the value
o. the property because 1t was obvious
tnat the borrower was overbuvine And
overoorrowing. And yet, we have been
aols to insure loans of rs, 80 or On
per cent OF the value where it vas
qufe as obvious that the borrower
was Undertaking 4 transaction which
ne would be able to carry out.
Some Loans Too Short.
We have had the experience .,so
q rejecting one or two loans of em,al
amounts and equal loan-value ratio.
ana equal as to the acceptability 81
Ins borrower, because the term of one
mortgage was too short. In one Gaze
uAs payments, spread over q longer
period, made a desirable Transaction
~niis in the other the shorter term
ana larger payments rendered the
mo- tgage ineligible for insurance.
Given two applica tions involving
transactions identical in every respect
e1espe Tor different loan-yalue ratios
W. would not necessarily accept only
the application involving the smaller
ratio. Naturally, We would give the
smaller ratio loan a higher rating, and
We might find that the other loan
would have to be rejected or modif,ed
before acceptance. However. IT. !.
possible that both loans might be &C.
cepted.
Under our system, the acceptance
II the loan is based upon the analvsis
OF every factor affecting the transac.
tion' and final approval is given onlv
"here study OF the results reveals that
the transaction is well balanced ana
sound in every respect"