The Office of Thrift Supervision's warning last week that high-loan-to- value lending is a risky business has quashed one buyout deal, but leaders in the business say it should not affect them significantly.
On Aug. 27, the OTS issued a stern warning and strict guidelines to thrifts that make loans for 90% or more of a home's value. The next day Bay View Capital Corp., a San Mateo-based thrift holding company, said it had scrapped its $153 million deal to buy the high-LTV lender PSB Lending Corp., in part because of the OTS' new guidelines.
These loans, which let homeowners borrow up to 125% of the value of their homes, have become increasingly popular for paying off high-interest rate credit card debt.
It was Bay View's application that originally drew the OTS' attention to the proliferation of high-LTV lending, an agency spokesman said. More banks and thrifts are offering these loans, drawn by the higher fees and rates they carry.
Lenders securitized $5.5 billion in high-LTV loans in the first half, versus $6.85 billion in all of 1997, according to Inside MBS and ABS, a trade newsletter.
The OTS' report includes some critical statements about the product. Among them:
Only 30% of borrowers who used home equity loans to consolidate debt remained free of credit card debt a year later.
These loans are long term, but are often underwritten using Fico scores, which are predictive only for a two-year period.
Thrifts that keep these loans on their books are prohibited from making high-LTV loans for more than 100% of their capital and will be increasingly scrutinized as they approach that 100% mark.
The agency's action is unlikely to significantly affect high-LTV lenders, said Daniel Phillips, chief executive of FirstPlus Financial Corp., Dallas, by far the largest in the business.
Most companies that make high-LTV loans do not hold them in portfolio and therefore are not required to follow the OTS' capital requirements, he said.
Mr. Phillips said he was not surprised by the OTS' action, adding that the agency may have initially been "caught unaware" by the magnitude of high-LTV lending by thrifts.
The guidance that the OTS put out is "workable" for FirstPlus, he said.
FirstPlus is awaiting the OTS' approval for its plan to buy Life Financial Corp., a Riverside, Calif.-based holding company for Life Bankcorp. Mr. Phillips said he expects the deal will be approved.
The high-LTV market continues to be dominated by nonbank entities that do not generally have to follow OTS guidelines, noted J. Paul Redding, founder of Ditech Funding, Irvine, Calif.
About one-tenth of Ditech's business is high-LTV loans, Mr. Redding said. He defends them, saying the higher interest rates offset the risk. In addition, loan-to-value ratios generally drift down as homes increase in value, he said, making the loans less risky. Delinquencies are only 1.6% of Ditech's portfolio, he said.
The company will eventually go ahead with plans to conduct an initial public offering, as indicated in filings earlier this summer, Mr. Redding said. But he added, "Market timing is not good at the moment."