An Orange, Calif., subprime lender is sending that message to consumers, offering a mortgage of up to 125% of a home's value at purchase. All they need is a Fair, Isaac Co. credit score of 650-an A-minus -10% of the home's value stashed in a liquid asset such as a 401(k) plan, and 12 months as a homeowner. What does the borrower do with the extra 25%? Whatever he or she wants- there's no requirement to reinvest the money in the home. The 125% purchase-money loan program being offered by Master Financial Inc. is the latest and most aggressive in a wave of loan products that let homeowners borrow more than the equity in their homes. Mortgage companies and banks have been raising eyebrows among conservative lenders by offering second mortgages that, when combined with a remaining first mortgage balance, exceed 100% of a home's value. But this offering goes a step further. It is the first time a lender has deliberately offered homebuyers an initial mortgage for more than the value of the home. With a product this aggressive on the market, the previously maligned high loan-to-value home equity loans could begin to look almost mainstream. Indeed, one leader in high loan-to-value home equity said competition has been brutal as bigger lenders vie for the high-yielding business. "It's been a long 18 months that I've had to defend the product," said Jeffrey Moore, chief executive of Mego Mortgage Corp. "Now that a small pack of us has done so, everyone wants in." Mego, based in Atlanta, makes "cash-out refi" loans by refinancing first mortgages as high-LTV loans. Borrowers often use the money they receive to pay off credit card debt. Mego Mortgage; FirstPlus Financial Corp., Dallas; General Motors subsidiary RFC Financial; and Preferred Credit Corp., Irvine, Calif., are among the industry veterans that have all been making these loans for at least a year. The Money Store Inc., Union, N.J., is the newest entrant in the growing market. The consumer finance giant announced this week that it would begin making second mortgages that, when combined with the balance on the first, equal up to 125% of a home's value. Entering the market was "purely a business decision because there is demand for the product," said Jeff Rogers, director of investor relations at the Money Store. The company will be securitizing the loans and selling them as asset-backed securities. Last month, Countrywide Funding announced that it would offer a 125% loan-to-value product. And United Companies Financial Corp., Baton Rouge, La., and Cityscape Financial Corp., Elmsford, N.Y., have also begun offering the product in the past year. An increasing number of banks are also offering loans that exceed a home's value, according to the most recent Consumer Bankers Association survey. The new Master Financial product is an example of "being innovative and moving into the 21st century," said Michael McQuiggan, director of first mortgage lending for the company. But the product gives some observers pause, and some say it's a sign that the home loan industry has just gone too far. "That sounds pretty crazy," said Steven Eisman, an analyst at Oppenheimer & Co. "Fico, schmico," he said, referring to the acronym for Fair Isaac Co., which produces credit scores. "It's definitely pushing the envelope." High loan-to-value mortgages are more risky because of the credit's unsecured character, explained Katrina Blecher, an analyst at Gruntal & Co. The loan is "more like a big credit card," said Christine Clifford, a partner at Wholesale Access, a Baltimore research firm that specializes in the home equity sector. But until an economic downturn triggers a decline in home values, it seems to be all systems "go" for high-LTV lending. In fact, investor demand for pools of the securitized loans is "extremely high," said Mego's Mr. Moore. Consumer demand continues to climb as homeowners become aware of the product's availability. Mr. McQuiggan said his phone has been "ringing off the hook" since the loan was introduced last week. The Master Financial loan program is a combination of an 80% first trust deed, which carries a 10% interest rate on a 30-year, fixed-rate loan, and a second trust that may bring the total credit up to 125% of the home's value. Interest rates for the second trust start at 12%. First mortgage loans of up to $300,000 will be offered and second loans of up to $75,000.
