loans, said the head of one of the industry's largest companies. "The worst news is behind us," said Hugh Miller, the upbeat chief executive of Delta Funding Corp. in Woodbury, N.Y. Spreads are improving, Mr. Miller said, with more buyers coming to the market to buy securities backed by home equity loans. Home equity lenders, which primarily lend to customers who do not quality for bank loans, were crushed in recent weeks by weak demand and falling profits from asset-backed securities. Investors, jittery over world financial markets, fled from high-risk investments. Meanwhile, the asset-backed securities market was flooded with home equity paper by companies forced to liquidate their holdings when lenders pulled working-capital loans. Now most asset-backed investors say the market will improve in the first quarter of 1999, Mr. Miller noted. He said the market will stabilize in the second quarter of next year, in part because a rush of deals that issuers have put off this year will hit in the first quarter. The recent belt-tightening in the asset-backed market is ultimately positive, Mr. Miller said. "There weren't enough barriers to entry," he said; "now there are." Monoline insurers and rating agencies are now more conscientious about the deals they see, he said. Ultimately, this conservatism will "restore investor confidence to the market," Mr. Miller said. Spreads have already improved, Mr. Miller said, but the extent of their improvement is "a function of who you talk to." Meanwhile, all other asset-backed "sectors are trading better," Mr. Miller added. "It's just a question of how much better." The rise of interest rates in the last two weeks means that investor expectations for spreads are going down, Mr. Miller added. Meanwhile, prepayment speeds are decreasing, Mr. Miller said, because competition has decreased and lenders are no longer poaching each other's portfolios. Delta is not expected to have to restate the value of its assets, unlike others in the business, because it has built a lot of conservative measures into its financial model, Mr. Miller added. Delta is two-thirds-owned by insiders and has a real incentive to make sure its earnings and stock price are solid, he said.
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