LTV ratio and default risk

CFA Level I
#1

Talking about residential mortgages, the higher the LTV ratio:

  1. the higher the homeowner’s equity.
  2. the more likely the borrower is to default.
  3. the less likely the borrower is to default.

Dumb Question, but from my perspective a higher LTV is given to individuals with good credit scores or with better ability to repay debt. Now the correct answer is 2, in which some part I agree (higher loan equals higher risk to default) , but also I disagree given what I mentioned above. What’s your take on this?

#2

The lower the equity, the more a homeowner would be willing to walk away from a mortgage if things go south. This was especially true 15 years ago when some people had negative home equity!!!