It’s all a matter of risk profiles, which I won’t go into detail here with, but essentially, it boils down to –
How likely is it that someone will decide to quit paying and run off, abandoning the property? When you own 5% of it, it’s not all *that* expensive to decide “fuck it, let the bank try to take it”. 20%? Well now you’re talking about real money, a substantial investment.
How likely is it that prices change? Well, from year to year values can fluctuate. Odds are pretty decent that outside of extreme situations, the value of a house could be +/- 5-10% compared to the previous year.
Much less likely for a house to be worth 20% less next year than this year.
So, basically, it’s unlikely that either someone will walk away from a house they own 1/5 of, and also unlikely that it suddenly drops in value by 20%, so the bank (really, FNMA and FHLMC) is confident that they don’t need to insure the mortgage against default.
Also, they’re generally not allowed to require you to have it below 80% LTV, and must remove it below 78% except in specific cases, by law (HPA, 1998)
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