Posted By: Mike Baker
LTV Calculation - 07/15/11 03:42 PM
Example of a question recently posed to me...For 1 loan there are 3 pieces of collateral, 1 of which is encumbered by a lien with another bank. However, the other bank agreed in writing that should the collateral be sold, our bank receives $300,000, ahead of anything which they may receive. Now I was not in on that agreement, but apparently the other bank as well as ours does not anticipate that they or we would receive any less than the $300,000 due to the property location and desirability of the site. For LTV calculation purposes, what is the approach? I said since $300,000 is what we are "guaranteed" [no more than that amount would come to us], then we list the collateral value as $300,000 for that parcel; based on our position, that is all that is relevant; if it were sold for $2,000,000 that would not matter as far as what we would receive. For example's sake, assume the other 2 properties are valued at $350,000 each, which would then result in a total collateral valuation, by my approach, of $1,000,000. Assume the loan balance at this time is $700,000.00. Therefore, by my approach, we have a 70% LTV. The loan officer felt that the following would be valid...deduct the $300,000 from the current $700,000 balance [since, if it came to that, we would apply the proceeds received to reduce our loan]. That would leave $400,000 balance, divided by $700,000 value of the other collateral, resulting in a derived LTV of about 57.14%. If, for example, you were looking at a policy/guideline LTV maximum of 65%, by my approach, there would be an exception. By the loan officer's approach, we would be well within the guidelines. My argument: 57.14% would be the LTV if the receipt occurs today. However, that is not the case.
What do you think? Moreover, how do you think that regulators would view this situation? Thank you for your input.
What do you think? Moreover, how do you think that regulators would view this situation? Thank you for your input.