The loan-to-value ratio (“LTV”) of a mortgage equals the loan amount divided by the property’s value. The LTV is a key indicator of mortgage quality. The lower the LTV, the more likely it is that the mortgage can be paid off even if there is a foreclosure and the property has to be sold, and the more motivation the homeowner has to stay current with his or her payments.
The weighted average LTV is a standard measure of the quality of a pool of mortgages. The weighted average LTV is calculated by weighting each LTV by the respective loan amount, and then dividing the sum of the weighted LTVs by the total loan amount.
Suppose we have a $6 million pool of mortgages with a weighted average LTV of 80%. We would expect the total property value to equal $7.5 million = $6 million/.8.
But the total property value is actually $9 million.
How is this possible?
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