Bay View Capital Corp.'s $300 million bid for PSB Lending Corp. is attracting attention as legislators and other lenders debate the value ofthe controversial high-loan-to-value loans PSB makes.
The deal, announced Wednesday, was the first by a federally insured financial institution for a player in the fast-growing but controversial business of high-LTV lending.
Bay View's commitment is not a small one; it sees high-LTV loans making up one-quarter of its portfolio in the future, and the bank would keep these loans in its portfolio rather than securitizing them as other high- LTV lenders have done.
The loans let homeowners take out a first or second mortgage loan for more than their property is worth. Consumers are snapping them up in droves and using the excess cash to pay off higher interest rate credit cards, buy cars, pay for education, even take vacations.
High-loan-to-value originations doubled in 1997 to $10 billion, as specialty finance companies jumped into the market. Analysts estimate that the overall market could be as large as $200 billion. As competition in the field increases, some lenders are offering larger and larger loans-even up to 150% of a home's value.
Sen. Lauch Faircloth, R-N.C., already an outspoken opponent of high-LTV lending, is calling for regulators to scrutinize the deal "cautiously and carefully," said a staff member from the senator's office. "The fact that half of the bank's assets will be tied into high-LTV lending makes him fearful," she said. "He's very troubled by companies that concentrate on high-LTV lending," she said.
In February, Sen. Faircloth called upon the General Accounting Office to examine high-LTV lending practices. A study is due in late July, a spokesman for the GAO said.
According to a study recently conducted by Regional Financial Associates, West Chester, Pa., bankruptcy filings increased at the same time as lenders have raised loan-to-value ratios for new mortgages.
The Office of Thrift Supervision has no specific policy on high-LTV lending because it is limited in the industry it regulates, a spokesman said. But the OTS will look more carefully at an institution that makes such loans, the spokesman said, to ascertain that it has proper management and controls in place.
The Federal Deposit Insurance Corp. has not seen any of the institutions it supervises making such loans, a spokesman said, and therefore has no comment on the riskiness of such lending.
For its part, San Mateo, Calif.-based Bay View said that buying a niche lender like PSB Lending made more sense than buying another commercial bank. Bay View "could have bought several other commercial banks that we've had discussions with," said chief executive Edward H. Sondker, "but if I had to sit across the table from an investor and tell him how that would add value, I would have to scratch my head and say, 'Well, it's strategic.'"
Other banks and thrifts are mixed on the business of lending more than a home's value.
GreenPoint Financial Corp., a New York-based thrift that has been increasing its consumer finance presence "wouldn't rule out the possibility" of buying a high-LTV company, a spokesman said. "If a company had done a good job at it, we would be happy to take a look at it."
Chase Manhattan Corp., New York, on the other hand, "isn't enamored" of the business, a spokesman said, and is unlikely to be making high-LTV loans.
Astoria Financial Corp., Lake Success, N.Y., "has absolutely no interest in originating high-LTV loans, or buying a company that does," said chairman George Engelke. Mr. Engelke was quick to add that making such loans is not necessarily dangerous for institutions that have figured out the right methods.
KeyCorp also does not lend more than 100% of a home's value, a spokeswoman said, and does not plan to do so.
Bay View executives said that judging by the initial response they doubted the deal would have any difficulty passing regulatory muster.
"We've talked to the OTS about this transaction," said Mr. Sondker, "and haven't been given any negative feedback."
Bay View is going to concentrate on customers with high credit scores and sell loans that fall below credit standards, said Mr. Sondker in a conference call after the deal's announcement.