Daniel T. Phillips did not make it to the high-loan-to-value conference in Chicago last month, but he did not need to. His presence was everywhere.
Mr. Phillips' company, FirstPlus Financial Corp., is by far the largest in the fast-growing business of providing mortgages beyond a home's value.
At the conference, one high-LTV chief executive, not yet 30 years old, recounted with biblical fervor the story of how FirstPlus was formed by combining traditional and home improvement lenders. Others checked the FirstPlus stock price constantly from beepers. At one point the price dipped, and there was a rush to the phones to buy. Some told anecdotes in the hallway about "the time I met Dan."
And why not? In this business, Dan Phillips is the one to watch.
In less than four years, the swashbuckling 48-year-old ex-Marine has built a company with more than $1.5 billion market capitalization by selling a product that didn't exist a decade ago.
"I knew it was a big market, I just didn't know it had the potential to get that big," Mr. Phillips said.
Mr. Phillips, a former assistant manager at Beneficial Finance, formed the company in 1994 with a now-retired partner by merging conventional lender State Financial Acceptance Corp. with Remodelers National, a Title One lender.
Since then, FirstPlus has helped create a whole new industry, and a new way for homeowners to manage their debt.
Borrowers are snapping up second mortgage loans-increasing their mortgage debt to 100%, 125%, even 150% percent of their homes' value-and paying off high-rate credit cards with the extra cash.
First Plus wasn't the first company to make these loans. But it was the first to bring the product to Wall Street, in an asset-backed-securities deal with Bank One Capital Corp. in late 1994. The move opened the market, and earned Mr. Phillips a number of fans.
"Thank God he had good connections to the street and found a couple of people to believe in the product," said Andrew S. Jaymes, senior vice president, First Potomac Mortgage Corp., a Fairfax, Va.-based high-LTV specialist that sells its loans to FirstPlus.
Securitized high-LTV originations are expected top $10 billion this year. New finance companies and established banks are diving in on all sides.
But underneath the hubbub there is one constant-the sound of the uncoverted murmuring, "Are you sure it's safe?"
The performance of high-LTV loans is virtually untested. Years of Title I history is available, but those second mortgages require borrowers to plow the money back into their homes, thereby raising the value of the equity backing the loan.
With this new breed of loans, consumers can use the excess cash for whatever they want. Instead of an interest rate around 20% that unsecured personal loans traditionally carry, most high-LTV loans are made at 12% to 15%-too low, some say.
"I don't see why they should be treated differently from an unsecured personal loan," said Tom Foley, an analyst with Moody's Investors Services.
Rating agents, analysts, and Mr. Phillips insist that the structure of the securities makes investing in these loans and lenders safe. "We manage risk differently," Mr. Phillips said.
No one is sure how these loans are going to perform, said Duff & Phelps analyst Andrew Jones, so rating agencies are being extra cautious. Because of this, transactions rated by Duff & Phelps are required to carry a delinquency trigger, he said. If the bad loans in a securitized pool exceed a certain number, the company is required to kick in extra collateral.
In addition, the rating agency assumes that loss severities will be high, Mr. Jones said. "When we model, we assume a 100% writeoff" for loans that go into foreclosure, he noted.
Cautious accounting is also key to managing risk, Mr. Phillips said. The industry uses gain on sale accounting, which allows lenders to book profits they expect to receive when they make loans. Poor execution of gain on sale has already contributed to the undoing of Mercury Financial Corp. last year, and forced Green Tree Financial Corp. to take a massive charge last week.
"We amortize our residual assets at 150%, because it's safer," Mr. Phillips said. "We've given ourselves a huge cushion, and we're doing the same thing with defaults."
Mr. Phillips is organizing a meeting in early December with the heads of major high-LTV firms, to discuss what he calls "pushing the envelope" in the industry. "We're trying to get all people that operate (in this business) to standardize" everything from accounting practices to maximum loan limits, he said.
The industry isn't going to go away anytime soon, he said. "If you look at the way these assets are underwritten and managed, and the way that the resulting gains are booked, they are not very different from credit cards," Mr. Phillips said.
"It wasn't that many years ago that people wondered how to manage unsecured credit to millions of people."
The next step for FirstPlus is diversification, Mr. Phillips said. "We're kind of a one-trick pony right now," he said. "Our job is to convince people we can manage other assets."
Although he wouldn't name other asset classes, analysts cite credit cards and personal lending as good fits.
Despite the industry's reckless image, and Mr. Phillips' swaggering demeanor, some things at FirstPlus are more premeditated than they seem.
Take the company's Nascar race car. It isn't a flashy testosterone-o- meter-it is a well-researched marketing strategy, explains Mr. Phillips, who doesn't race cars himself. "We watched MBNA do it at baseball games," he explained. "The demographics are right. It's a huge branding opportunity."