Home equity lender Cityscape Financial Corp., a newcomer to the securities markets, has quickly become a favorite of Wall Street, eclipsing many long-established and better-known companies.
What's more, this reputation has been won at a time when most of the second-mortgage industry has been riding a securitization wave that is bringing in high profits. And its admirers believe Cityscape's success will prove durable.
"In the next 12 to 18 months, there will be a shakeout in the home equity industry" because of amount of recent entrants into the market. "And Cityscape will be one of the companies that comes out on top."
The Elmsford, N.Y.-based company built its reputation in part on its wholesale-only strategy, which keeps overhead low because it eliminates the need for branches. It has carefully crafted a network of relatively small originators and is not heavily dependent on any one of them.
The company saw revenues increase from $3.2 million in 1991 to $49.5 million last year. Loan volume in the first quarter of this year was almost $200 million, in contrast to $37.8 million for all of 1991. This puts Cityscape near the top 10 among home-equity originators - in the company of colossal, established players like Contifinancial, Household Finance, and United Companies Financial Corp.
But what has attracted the industry's attention is the performance of the company's stock since a December 1994 initial public offering, and a bold move into Britain's home equity market.
"We're the poster boys of the regional home equity industry," said Robert Stata, vice president for originations.
Earnings per share increased almost 1500% in the 12 months beginning April 1, 1995.
"I love their stock, I recommend it all the time" said Steven Eisman, an analyst with Oppenheimer & Co., New York. "Home equity lending is a very profitable business and they do it well."
Last September, the company completed the purchase of City Mortgage Corp. Ltd., a midsize home equity lender that makes loans in England, Wales, and Scotland.
City Mortgage was not a huge originator, but no one in the home equity industry had ever considered expanding outside the United States before. Thirty-year veterans were left scratching their heads and mumbling, "Why didn't we think of that?"
In fact, Cityscape's involvement in England has its peers considering similar overseas liaisons. Even Money Store Inc., usually cited as the industry's leader, is rumored to be exploring associations with German lenders.
Cityscape draws its strength from a managerial team that is "aggressive and cautious at the same time," said John Heffern, an analyst with Natwest Securities, New York. "They understand the elements and the risk, and produce good paper at good margins."
The company hedges its bets by diversifying its loan pools, explained president Rob Grosser. "We target smaller originators, who are generally underserved," he said.
In an industry where it's not uncommon for a wholesaler's top 20 brokers to generate more than 80% of a company's loans, Cityscape's top 20 are responsible for less than 28% of its originations. A lack of broker concentration means that Cityscape is less vulnerable to geographic changes in home values, Mr. Grosser said.
Property value is the most important factor when underwriting a loan, he said. Originally, Cityscape even went as far as requiring appraisers to include photos of the kitchen and bathroom, to gauge the borrower's pride in the home.
Although speed and sheer volume have prevented them from requiring interior photos on all the loans they underwrite now, the company does screen out less-than-thorough appraisers through a lengthy qualification process.
Credit scoring is not a concept that Mr. Grosser will consider for home equity loans. "I don't believe in credit scoring for nonconforming loans," he said. "You need an underwriter with a nose for the business to look at loan files."
The company's managerial successes can be attributed to lessons learned the hard way.
Mr. Grosser and Mr. Stata, who headed small northeastern home equity companies that suffered from the downturn in home values in the early '90s, were considering leaving the business in 1992 when a mutual friend suggested they meet.
Together, the two formed Cityscape Mortgage.
Robert Patent, a private investor and developer, signed later that year and is now executive vice president and treasurer.
Together the three developed a master plan. But, all three agree that the company's successes have dwarfed their expectations.
"At the end of the 1980s, when banks started making second mortgage loans, everyone said that finance companies would be put out of business," Mr. Stata said. "Obviously, that didn't happen."
Home equity loans no longer carry the social stigma they once did, he explained. "Now, people have two cars, two phones ... and two mortgages. It's a concept that's really come out of the closet."
Home equity lending's newfound popularity has brought many newcomers to the market.
"Some people are seeing the terrific profitability of the industry, and saying "High margins, hey, lets go grab some home equity loans,'" Mr. Heffern said. "But that's not as easy as it looks. Cityscape is not sitting there milking exceptionally high margins, they're plowing profits back into the company."
Plans to shift the company's focus from the Eastern Seaboard to the entire nation are under way - the company opened an office two weeks ago in Orange, Calif., where it hopes to mirror the success of its New York hub.