The high-loan-to-value market continues to swell, but speakers at a conference here said political controversies loom for the high-margin mortgage sector.
Mitchell Feinstein, legal counsel for the National Home Equity Mortgage Association, said the high-LTV market is here to stay but predicted a "big, bloody battle in Congress" over such mortgages.
Critics say that irresponsible lenders are letting consumers pile up too much debt, and that the popular loans will crash into foreclosure if the economy turns sour.
"There's a well-orchestrated consumer advocate lobby in D.C. that has as its mission the destruction of your business," Mr. Feinstein said. "They're telling Congress that the sole reason for your business is to acquire homes from poor black women."
Homeowners have been taking out the loans at a rapid clip to consolidate credit card debt. That means trading card interest rates of 18% to 20% for high-LTV rates of 12% to 15%-and sometimes borrowing 150% of a home's value.
The loans have drawn notice from Sen. Lauch Faircloth, R-N.C., who in October advised lenders to be careful of them.
Investors have varied views, believing the loans are "either the next credit card phenomenon, or the next Chernobyl," said Melinda K. Harris, an investment banker at Friedman, Billings, Ramsey & Co.
Lenders have to take care to avoid "Fico surfing," she added, referring to borrowers who pay off credit card loans and jump from loan to loan as their Fair, Isaac & Co. credit scores improve.
But she said the interest rate environment continues to draw a lot of attention to high-margin mortgages. "Every financial institution with a flat yield curve is interested in this business."
Attendance at the conference here was a mere fraction of that at the first conference on the subject, in October-but that could be attributed to a glut of similar conferences in the coming months.
And lenders continue to have access to the securitization market for these loans. In fact, more than $8.75 billion worth were securitized in 1997, and that number is expected to almost double in 1998, according to PaineWebber senior vice president Peter Rubenstein.
PaineWebber continues to be an advocate of the securities. High-LTV securitizations "have self-regulated credit support," Mr. Rubenstein said. "I know of no other product that offers that."
The securitized pools of high-LTV loans peddled on Wall Street contain a sizable amount of excess spread and over-collateralization, which act as a cushion if the loans do not perform as expected, he said.
Lenders have become more conservative in recent months-FirstPlus Financial Group, the Dallas-based leader in the business, is raising its minimum Fico score 10 points to 630, said Merrill Lynch vice president Ryan K. Asato.
However, making these loans to borrowers with high credit scores and high debt levels is resulting in high default rates, he noted.
Prepayment rates are running high too-- up to 10% after 18 months, according to Merrill Lynch research.
Trade groups are stepping up to the plate to try and change the public perception of the loans. The Home Improvement Lenders Association is stepping up its advocacy efforts, according to new president John Larose. "There's been overwhelming growth of the high-LTV product," he said, and the association is hoping to tell its story on Capitol Hill.
