FirstPlus Financial Group Inc. is still on a buying binge.
The Dallas-based home equity lender announced Monday that it has purchased Capital Direct Funding Group Inc. of Laguna, Calif. FirstPlus, which was known as RAC Financial Group until a name change Thursday, paid with an undisclosed amount of stock.
Capital Direct, like FirstPlus, makes second mortgages to high-credit- quality customers for more than 100% of the equity in their homes. The company is currently originating $18 million of such loans monthly.
Wall Street greeted the acquisition with glee, pumping up FirstPlus' stock more than 2 points in the 24 hours after the announcement.
But the phenomenal growth of the new high loan-to-value product has divided observers. The loans are often used to consolidate credit card debt at lower interest rates. Detractors say that the lack of a performance history and their unsecured element makes these loans dangerous.
"It's a food fight" on Wall Street, said Moody's Investors Service analyst Jonathan Lieberman, about the debate over the controversial product. "No one can prove persuasively that this is not another drug being fed to the debt-addicted consumer."
High-LTV mortgage loans are clearly risky, Mr. Lieberman added. "But," he said, "are they any riskier than credit cards? Probably not-except that credit cards pay off faster."
Bill Joiner, president of Capital Direct, disagreed. "You always have naysayers in the wings," he said. "We take a borrower and lower their payments by $500 or $600 a month."
FirstPlus will continue to seek out new assets using a similar strategy, said chief executive Dan Phillips in a recent interview. "We are, as we speak, investing in potential and future actions. We want to build a fence around our customer base," he said.
The company is planning to take advantage of Capital Direct's well- established direct-mail marketing system, Mr. Phillips said. The new subsidiary will act as an in-house mail facility for FirstPlus' marketing group, he said. Currently, Capital Direct mails 155,000 solicitations daily to homeowners.
In the past 12 months, FirstPlus has purchased a number of smaller loan originators. Capital Direct, like many of FirstPlus' recent purchases, was previously a correspondent lender, selling off an average of $10 million in loans per month to FirstPlus.