Mitigating Risk in an inflated market

Lower Loan-to-Value (LTV) Ratios What is LTV: The loan-to-value ratio measures the loan amount relative to the appraised value of the property. Mitigation Strategy: In an inflated market, MICs often reduce their LTV ratios to create a buffer in case property values decline. For example, instead of lending at an 80% LTV, they might cap loans at 65% to 70%. This lowers the potential loss if the property value drops, giving the MIC a safety margin in case of foreclosure or default.

Rigorous Property Appraisals What is Property Appraisal: An appraisal determines the fair market value of a property, typically conducted by a third-party professional. Mitigation Strategy: MICs place a higher emphasis on accurate and conservative property appraisals in inflated markets. They may require multiple appraisals or rely on more conservative valuation methods to avoid overvaluing assets. This ensures that the MIC isn’t lending based on speculative or temporarily inflated prices, minimizing exposure if the market corrects.

Higher Interest Rates and Risk Premiums What is Risk-Based Pricing: Charging higher interest rates for loans that present greater risks. Mitigation Strategy: In an inflated market, MICs compensate for the increased risk by charging higher interest rates, particularly on properties in areas where a price correction is expected. This additional risk premium helps to offset the potential losses from declining property values, ensuring a higher return on capital even in challenging market conditions.

Increased Focus on Borrower Quality (Character) What is Borrower Character: A borrower’s creditworthiness and financial stability. Mitigation Strategy: In an inflated market, MICs are more cautious about who they lend to. They prioritize borrowers with strong credit scores, stable income, and proven financial responsibility. By focusing on high-quality borrowers, MICs reduce the risk of defaults if the market corrects and borrowers face financial strain.