Amid Bronx Cheers, High-LTV Lenders Strut Their Stuff

Loans made for amounts higher than the value of a home continue to stir up controversy, even among normally thick-skinned subprime mortgage lenders.

The loans, which began proliferating last year, are designed to allow homeowners to pay down debts or fix up their homes. Introduction of such loans into the securitization market raised eyebrows on Wall Street earlier this year.

It was apparent at the National Home Equity Mortgage Association convention here last month that lenders were split into two camps: Those who make the loans and those who mock them.

Detractors need to remember that these loans are intended to be made to borrowers with good credit history, said Robert Grosser, chief executive of Cityscape Financial Corp., Elmsford, N.Y.

"There's a real misconception, because the people marketing and selling these loans usually have a subprime division," said Robert Grosser. "It's not a subprime loan."

Mr. Grosser was speaking at a panel here on the controversial product. The panel was one of the best attended at the conference, and questions from the audience came thick and fast. Skeptics in the audience were not convinced by Mr. Grosser's credit-quality argument.

"You have people who abused their credit cards, went to a broker, and took out a section 32 mortgage on their home," said Stan Zimmerman, former president of the association and president of Home Budget Loans, Los Angeles. "How can you call that an A loan?"

Most high-LTV loans fall in the section 32 category, meaning they cost more to the borrower and require additional disclosure documents from the lender, which the borrower must sign.

Success with the product requires careful tracking of borrower statistics, said Jeff Moore, president of Mego Mortgage, Atlanta. Mego's high-LTV borrowers have an average Fico credit score of 672, considered prime quality, and 88 months on the same job, Mr. Moore said.

"How has the market managed to grow so large, so fast?," asked another lender.

Volume has been coming from brokers who had specialized in home improvement loans, said Mr. Moore. "Making Title I loans requires a lot of red tape," while these high-LTV do not. In addition, consumers can take a tax deduction for the interest on their loans, he said, making the product more attractive.

Mr. Moore added that there was really no reason to cap the loan size at 125% of a home's value. "You can really go to 140% or 150%," he said with a smile.

Conspicuously absent from the panel was FirstPlus Financial's chief executive, Dan Phillips. The Dallas-based lender leads the high-LTV market. Mr. Phillips, competitors groused, was "probably out fishing."

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