What potential risk does a higher LTV ratio present to the lender?

A higher loan-to-value (LTV) ratio indicates that a larger portion of the asset's value is being financed through debt. This presents a significant risk to lenders because if the value of the asset decreases, the amount owed on the loan can exceed the current market value of the asset. In such a scenario, the lender may not be able to recover the full loan amount through foreclosure or sale of the asset, leading to potential financial losses.

In real estate, property values can fluctuate due to various factors such as market conditions, economic changes, or structural issues. If the asset's value declines and the LTV ratio is high, the lender faces an increased risk that the collateral backing the loan will not be sufficient to cover the outstanding loan balance. This situation can result in a higher probability of default and financial loss for the lender.

Understanding this risk is crucial for lenders as it affects their lending decisions and risk management strategies. High LTV ratios may lead to more stringent underwriting criteria, as lenders seek to mitigate the potential for losses due to declining asset values.