Home equity stocks have rallied in the past week, thanks to a rate rise and rumor that FirstPlus Financial Group was in merger talks with a subprime lender controlled by financier Leon Black.
Many of these stocks doubled in price after hitting 52-week lows Oct. 7. United Companies Financial Corp. of Baton Rouge, La., rose 58% from its low of $3.4375 a share, to trade midday Tuesday at $5.375. Amresco Inc. of Dallas rose 165% during the same period, to $5.4375.
Despite the gains, these companies are still trading well below their year-earlier levels.
An uptrend in interest rates indicates that these lenders will have lower prepayment rates, analysts said.
Several were forced to cut earnings expectations this year when loans prepaid sooner than expected, scaring investors from the sector.
News that subprime lender WMC Mortgage Corp. of Woodland Hills, Calif., is planning a merger with high-loan-to-value lender FirstPlus Financial is also buoying the market, analysts said. The news first appeared Friday on MortgageWire, an on-line mortgage service.
WMC Mortgage-owned by Apollo Advisors, an investment firm run by former Drexel Burnham Lambert mergers and acquisitions head Leon Black-was planning on going public until stock prices for subprime companies tanked in recent months.
It could be planning a reverse merger with FirstPlus, MortgageWire reported. A reverse merger occurs when a nonpublic company melds into a public one, and both trade under the public company's ticker symbol.
Apollo bought WMC Mortgage in 1997 from lumber and paper giant Weyerhaeuser Inc. of Tacoma, Wash., and sold its conforming mortgage business to Norwest Corp. of Minneapolis this year.
WMC chief executive Scott McAfee said he could not comment specifically about a deal with FirstPlus but called it a "great business, with great people."
Most of WMC's loans are first mortgages to consumers with damaged credit, Mr. McAfee said.
The acquisition of a company such as FirstPlus, which lends to people with excellent credit for more than their home's value, would "round out" WMC's product line, Mr. McAfee said. "There's not a lot of overlap," he said.
WMC has not experienced the liquidity crunch that other subprime lenders have, thanks in part to its well-funded parent, Mr. McAfee said, and it is planning acquisitions.
"When we got into this business, we predicted this" liquidity decline, he said. "We're aggressive about building market share" through acquisitions, he said. "Now we can do it at an attractive price." u
