FirstPlus Financial Inc., which specialized in making loans up to 125% of the value of a home, filed for bankruptcy in March, a victim of the one- two punch of declining credit quality and last fall's liquidity crunch.
Its woes, however, have not dissuaded Residential Finance Corp., a wholesaler and subsidiary of GMAC Mortgage Corp., from intensive pursuit of such loans, known as 125s.
Not all customers for 125s have spotty credit records. Many of them are prime credits and their loans are classifiable as subprime only because of the high loan-to-value ratio.
John A. Imbriale, a managing director of Minneapolis-based RFC, said the prime customers were the only ones his company was pursuing. He says RFC has approached the 125 business "very cautiously."
"In 1997, we opened up to a few clients," he said. "In 1998, we brought in all our clients. This year, we expect to do $2 billion in the product."
But hasn't it been dissuaded by the collapse of FirstPlus?
"I don't know what problems FirstPlus had," he said, "but we are confident about the performance of our loans. We have been careful to buy only from within our credit criteria. In fact, we recently raised our minimum Fico score recently, and it's now 640."
The philosophy, Mr. Imbriale said, was "to buy the right product, pay the right price, using the right credit criteria." By following this philosphy, RFC should make money on the product, he said.
Mr. Imbriale added that RFC also services its own loans, giving it an additional margin of control.
FirstPlus was strapped when the market for high-LTV paper evaporated last fall. It also had difficulty in obtaining warehouse credit for its loans. With no way to fund new loans, it was forced into Chapter 11 in March.
Some home equity lenders have complained that low interest rates make it hard for them to do business because potential customers are simply refinancing their first mortgages.
But Mr. Imbriale says "there is really tremendous demand for the product." He explained that many prime customers have gotten overextended and simply want to bring their monthly costs down by consolidating their debt at a relatively low rate."
Mr. Imbriale says investors in mortgage-backed securities have been very receptive to the RFC 125 packages. It did a successful securitization in June 1998 and a second in March of this year. He expects to do one each quarter from now on.
Perhaps significantly, RFC did not do a securitization last fall, when the market for many asset classes simply disappeared, including the market for high-LTV-backed securities. Hedge funds had been the principal buyers of such papere, but they have since been replaced by banks and other investors.
Banks are also starting to make the 125 loans and sell them to RFC. "They are definitely catching on with banks," Mr. Imbriale said. "If they don't want to hold the loans in portfolio, they know they can sell them to us," he said. "You really have to look at them as unsecured loans."
Mr. Imbriale says the loans, while made to prime credits, are serviced as if they were subprime. "We make a welcome call," he said. "We remind them when payment is due and give them an 800 number for customer service. And they get a call five or six days after the due date."
The borrowers are very much concerned with their credit records, Mr. Imbriale emphasized, so they are responsive to the servicing calls.
Some investors, though, remain concerned about how such loans will perform in an economic downturn. Mr. Imbriale is confident that the loans will be solid because of the high credit standards that RFC insists on. "You may see an uptick in delinquencies, but we think the loans will perform well," he said.
Gordon Monsen, a specialty finance investor who left PaineWebber two years ago to focus on the high-LTV market, agrees. He said earlier this year that lenders had tightened their credit standards and the loans made more recently should perform well.