Mego Loses $11.7M in Quarter,Trims Staff by 20%

Mego Mortgage Corp. on Monday reported an $11.7 million loss in the quarter ended Nov. 30 and said it has cut its work force by 20%.

The Atlanta-based, high-loan-to-value lender was one of the first in the volatile home equity sector to report fourth-quarter earnings, and analysts said the downbeat report foreshadows disappointments for a sector plagued by prepayments.

"We believe that there will definitely be an economic impact reflected in fourth-quarter financials that is not reflected there today," said Jeffrey Evanson of Piper Jaffray, Minneapolis, speaking of the home equity sector in general.

Piper Jaffray is reassessing the way that it values these companies, Mr. Evanson said. After several high-profile writedowns, other analysts are changing the way they look at these lenders to account for higher-than- expected prepayment rates that lead to lower gains on sales of loans.

By Monday's close, the company's stock price was unchanged from its $4.062 opening price, in part because the poor results had been anticipated. On Dec. 8, Mego had announced that it would have to take a $16 million charge to cover faster-than-expected prepayment speeds.

The elimination of one-fifth of the company's work force, or about 100 employees, comes as part of a cost-savings plan initiated this month. Mego said it significantly shrank its dealer division, which makes loans through home improvement contractors. The division originated loans at a higher cost than its other units, Mego said.

The company lost 95 cents a share in the quarter, versus a 24 cent-per- share profit for the three months ending Nov. 30, 1996.

During the quarter, the company revised its prepayment assumptions to 17% of loans by the pool's 15th month. Losses are expected to reach 2% annually by a pool's 18th month, and 9% of the total portfolio over its life.

Analysts have voiced doubt that Mego has enough capital to survive, but the company reported it has $5.2 million in cash, $28.2 million in a warehouse line, and $55.7 million in loans for sale.

Mego originated $199.9 million in loans for the quarter, a 220% increase over the same period of 1996. The company had $94.3 million in mortgage- backed securities in its portfolio on Nov. 30, down 11.3% from a year earlier.

Although Mego's stock price was unchanged Monday, the largest high-loan- to-value lender may have been hurt by the announcement. FirstPlus Financial Group, Dallas, lost almost 10% during Monday's trading. The stock closed at $33.75, down $3.

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