The high-loan-to-value business is "pretty darned risky," with losses that may mimic those of credit card pools, according to a recent Moody's Investors Service report.
The rating agency expects originations of high-LTV loans, which let consumers borrow more than their home's value, to almost double in 1998, to $15 billion.
Lenders have "little margin for error," said Linda Stesney, managing director for residential mortgage-backed securities at Moody's. "Lenders are likely to suffer a complete loss if they make a mistake," Ms. Stesney said. "High-LTV lenders themselves note that if you give borrowers a large enough unsecured loan, they have little incentive not to just walk away from the property."
High-LTV lenders rely on Fair, Issac & Co. scores to determine borrowers' eligibility, and contend that these loans are safe because they are made only to homeowners with high scores.
But Fair, Isaac scores are better suited for credit cards than 20-year mortgage loans, the Moody's report said.
High-LTV lenders lack protections that credit card issuers have, like the ability to reduce a credit line or increasing interest rates when a borrower pays late. High-LTV securitizations also lack the early amortization trigger of credit card securitizations, which let an investor dump poorly performing securities after two years, Moody's said.
The loans continue to be the fastest-growing product in the home finance business, according to recent data.
Issuance of securities backed by these loans reached almost $5.5 billion in the first half, according to data compiled by Inside MBS and ABS, a trade newsletter. Lenders securitized $6.85 billion of these loans in all of 1997.
Homeowners have increasingly been using such loans, which are made for up to 125% of a home's value, to consolidate credit card and other unsecured debt.
FirstPlus Financial Corp., Dallas, has been the largest issuer in 1998, with $2.14 billion in loans, versus from $3.05 billion in all of 1997. Empire Funding Corp. ranked a distant second. The company has securitized $534 million of high-LTV loans in the first half, versus $1 billion in all of 1997.
Master Financial was a close third, with 1998 originations of $533 million, versus $360 million for all of 1997.
Money Store Inc. and Countrywide Home Loans, among other large lenders, began making the loans last year. Several banks have also begun offering high-LTV products.