The controversial high-loan-to-value mortgage is gradually gaining acceptance with lenders and Wall Street, and its proponents promise that it's here to stay.
The high-LTV loan will become as credible a basis for securities as subprime mortgages are, said PaineWebber vice president Peter Rubinstein.
PaineWebber, the largest issuer of securities backed by high-LTV loans, is sponsoring a conference devoted to the product today and Thursday in Chicago.
"Look back at the B and C market," Mr. Rubinstein said, referring to loans to less creditworthy borrowers. "When issuers started making these loans and Wall Street securitized them, people said, 'How can you do that?'"
Despite some early blowups in the securitization of subprime loans, demand for securities backed by these loans continues to grow, Mr. Rubinstein said.
The high-LTV product is so new, he said, that several dimensions have yet to be explored. "You can go to 135% or 145%" of a home's value, "do subprime high-LTV, do floating-rate loans, do extended terms ... these things haven't happened yet."
Wholesale Access, a Columbia, Md., consultancy, projects the volume of these loans in 1997 at $10 billion-twice last year's total. The number includes securitized loans only, the consultancy noted.
Mr. Rubinstein said the potential for growth is tremendous, considering that consumers have about $1 trillion of credit card debt and could replace much of that with home equity debt. "There has to be couple hundred billion of loans there," he said.
PaineWebber has issued $6.5 billion of securities backed by high-loan- to-value loans, said Paul Jenison, managing director and head of the firm's asset-backed unit.
Mr. Jenison said his comfort with the product stems from his background in credit cards. Fears that consumers will roll their credit card debt into a high-LTV loan and then charge big new purchases to their credit cards are not irrational, he said, but may be overblown.
"That's the same issue you find in commercial credit-it requires some degree of vigilance," he said, "but it's no different from a consumer going from a low balance on their credit card to a high one."
Bear Stearns, Greenwich Capital, Lehman Brothers, and Prudential Securities have also issued securities backed by high-LTV loans. Despite the stock market's recent drop and investors' suspicion of high risk, there's no indication that capital will dry up for these companies, Mr. Jenison said.
The profit margins are just too big, an originator noted.
Despite the 110% over-collateralization that these securities carry, "there's a spread that's really getting noticed by the Street," said Andrew Jaymes, senior vice president at First Potomac Mortgage Corp., a Fairfax, Va., originator of high-loan-to-value mortgages.