U.S. Bancorp is expanding its commitment to nonconforming mortgages.
In recent weeks the Minneapolis banking company has increased its stake in New Century Financial Corp., buying 500,000 shares for $9.90 a share. This is in addition to its $20 million investment in the subprime lender last October, when the two companies reached a partnership agreement.
And privately, bankers say that U.S. Bancorp has bought nearly $1 billion of controversial high-loan-to-value loans-second mortgages that exceed a borrower's equity-from FirstPlus Financial Group. FirstPlus said Dec. 30 that it had sold about $900 million of such loans to "a large U.S. national bank."
U.S. Bancorp would not confirm or deny the transaction, which was first reported in National Mortgage News this month.
But several sources said that U.S. Bancorp paid a very reasonable price for the loans, in part because FirstPlus has been in a capital crunch. In October, Dallas-based FirstPlus formed a strategic alliance with Coast-to- Coast Financial to securitize loans, but Coast-to-Coast pulled out of the deal in late December. U.S. Bancorp has already been making high-LTV loans through its 1,000 branches for a year and a half, said Brian Smith, senior vice president in the company's retail products division.
Many banks have shunned high-LTV loans, citing a lack of historical data on their performance. U.S. Bancorp is relying on the borrowers' bill-paying history.
"We're a score lender primarily-we'll go up to 125%" of a home's value, Mr. Smith said, "but only on the best credits."
Customers "don't come in wanting the 125 loan," Mr. Smith said. Instead, homeowners come in with specific needs, such as college tuition or home repairs and find that they do not have enough equity in their homes.
"Our strategy is to have the fullest set of products available," Mr. Smith said. The bank does not disclose the percentage of high-LTV loans it makes, he said.
But the New Century deal will probably let U.S. Bancorp increase its home equity portfolio by 10%, Mr. Smith said.
U.S. Bancorp held $5.74 billion of home equity loans in the second quarter of 1998 and originated about $300 million a quarter in the first half.
U.S. Bancorp's activities are "part of banks' natural evolution" to try to reach more customers, said a BT Alex. Brown analyst, George Bicher. "The more experience that a bank has" with nonconforming home loans, "the less worry investors have," he said.