The home equity industry is forging a link between mortgage lending and credit cards with a product that lets homeowners borrow up to 125% of their home's value.
Business is booming, participants said, fueled by demand from homeowners who are loaded down with credit card debt. Taking out a second mortgage and using it to pay off credit cards helps bring down monthly bills. Interest rates on the product range through the low to mid-teens, compared with credit card rates averaging 18%.
But lending more than a home's value leaves the holder with unsecured exposure, as is the case with credit card lenders.
"In a lot of ways, we should be compared with the credit card industry," said Dan Phillips, chief executive of FirstPlus Financial Group, Dallas. To mitigate risk, the company needs to hold high reserves. Consequently, it lends at rates higher than those offered by traditional home equity lenders.
FirstPlus, which began high-loan-to-value lending in 1995, has emerged as the market leader. It expects lending volume to more than double next year, reaching almost $4 billion.
FirstPlus gathers loans, mostly of A or B quality, through a wholesale network that relies on banks and through a marketing campaign that includes television and direct mail. The company's average loan is $27,000 and has a 109% LTV ratio.
Industry observers have voiced concern about the high-LTV product because of its untested Wall Street performance and the dearth of home equity information available in case a loan defaults.
But the concept of high-LTV lending is not new with FirstPlus, Mr. Phillips said, and the loans' performance can be predicted. "We grew up as Title One lenders," he said. Title One home improvement loans are "high LTV by their very nature; the only difference is that they're insured," he said.
FirstPlus drew on Title One performance data to illustrate how its new product would act. "That's how we got the rating agencies to rate the loans, and the insurers to insure them," Mr. Phillips said. "There's years of data out there - it's not rocket science."
Outsider apprehensions can be attributed to the product's newness to Wall Street, he added. "When second mortgages first appeared, the same fears appeared on the radar screen. Now, they're a commodity."
When underwriting a high-LTV loan, a borrower's credit history is more important than a home's value, lenders said. Other entrants in the market include Mego Mortgage Corp., Atlanta; Cityscape Financial, Elmsford, N.Y.; Irwin Home Equity Corp., San Ramon, Calif.; and Green Tree Financial, St. Paul.
"We don't look to get repaid by collateral," said the spokesman of a company with a small share of the high-LTV market. Making these loans safely depends on a company's skill at underwriting the customer's ability to repay, he added.
Most lenders refuse to make a high-LTV loan to a borrower rated lower than "B."
Industry observers have also expressed concern that high-LTV loans may affect the income tax deduction for home equity loans. Currently, homeowners can deduct the interest on loans for up to 100% of their home's value.
Critics said they worry that a large crop of homeowners taking full advantage of the deduction may cause Congress to reexamine, and perhaps eliminate, it.
