Despite encouragement from Wall Street firms and finance companies, most mainstream mortgage lenders are shying away from highly leveraged loans.
Some finance companies have begun making loans of up to 125% of a home's value, and Wall Street firms are clearly eager to repackage the credits as securities. But originators of traditional mortgages are concluding that the new loans are simply too risky-for both lenders and consumers.
"We're not comfortable with that much leverage," said C. Bruce Culbreth, national sales chief at Citfed Mortgage, Dayton, Ohio. "This is not a product we see a need to put out there."
Other lenders expressed similar sentiments, saying the products offer little chance of recovery if borrowers default. "Why look to overburden ourselves or our customers?" asked one West Coast mortgage banker.
Such a split between mainstream mortgage companies and Wall Street is unusual. Together, the groups built the conventional mortgage market, and investment banks were hoping for a similar teaming-and resultant fees-on promoting highly leveraged loans.
Mortgage bankers' reservations may not halt the burgeoning market for the leveraged products, which are favorites of finance companies and should reach $10 billion of originations this year. Indeed, some mainstream mortgage companies do offer the products. But a lack of general support from mortgage bankers nationwide could squeeze a channel that was looked to to fuel growth.
Lenders' resistance was apparent at last week's Eastern Secondary Mortgage Market Conference, sponsored by the North Carolina Bankers Association in Raleigh.
Mainstream mortgage lenders were not very responsive to Wall Street representatives and finance company chiefs who urged them to add high loan- to-value, or high-LTV, products to their rosters. Investment bankers and finance executives have a stake in stepped-up activity because they collect fees from lenders who sell the loans through them.
Finance company executives sought to ease lenders' fears, saying the loans are being given a bum rap. "There's a lot of myth about the product, and it needs to be dispelled," said John Mullins, president of Master Financial, a 125% LTV lender based in Orange, Calif. "This is not 'last resort lending.'"
Master Financial recently underscored the trend by making 125% loans available for home purchases and letting borrowers use the extra funds for any purpose. By contrast, most high loan-to-value lending focuses on home equity loans that, when added to remaining balances of first mortgages, exceed 100% of a home's value.
High-leverage home loans are offered primarily to high-quality borrowers who want to consolidate debt, said Gordon Monsen, a managing director at PaineWebber Inc.
He said the products have generally performed well since their launching a couple of years ago. About 40 mortgage banks, including Countrywide Home Loans, have begun originations, he added.
But others said more time is needed to get a true feeling for how the products will do. "We need to be rational about long-term prospects," said Gregory J. Bennett, president of Hamilton, Carter, Smith & Co., a mortgage advisory firm in Beverly Hills. "We haven't had enough history to know how securityholders will make out."
