To lend profitably to customers with high debt loads and poor credit, you must keep the reins tight, according to executives at First Alliance Corp.
For more than 25 years the Irvine, Calif., subprime mortgage lender has been lending to homeowners whom banks shun. Along the way it has developed a distinctive methodology for pulling in customers, writing loans, and ensuring performance.
President and chief executive Brian Chisick founded the company in 1971. First Alliance was then a second-mortgage broker operating out of one office in Irvine.
Now it lends through 26 offices in 16 states and the United Kingdom, is projecting earnings growth of 20% a year, and has visions of expanding to all the major metropolitan areas in the United States. This year it is expected to book more than a $500 million of loans.
First Alliance uses direct mail to target debt-strapped homeowners who have built up substantial equity in their homes.
The company caters to blue-collar homeowners of low to middle income who have been using their credit cards to bridge the gap between income and lifestyle and have used up their credit lines-"people really struggling to survive," Mr. Chisick said.
When you live from paycheck to paycheck, it's "normal" to become overextended, he said, "because the kids need shoes, etc."
Homeowners can respond to the company's mailer by calling a telemarketer, who does initial underwriting. Then First Alliance sends out an in-house appraiser to assess the home. At that time, a sales appointment is made. The homeowner then goes to a local First Alliance office to meet with a loan officer.
Although his sales tactics are "aggressive," Mr. Chisick said, loan losses are kept to a minimum because appraisals are conservative and loan- to-value ratios are less than 75%.
Refinancing a home mortgage with First Alliance and consolidating credit card bills can save homeowners from $200 to $1,000 a month, he said. The average interest rate-9.5%-is significantly below a typical credit card rate.
Homeowners pay a hefty 10% to 14% of the loan's value in origination fees, which are rolled into the loan but recouped by First Alliance immediately upon securitization, helping the company maintain a positive cash flow.
Delinquency rates are low, compared with the competition's, and continue to decline. For the quarter ended March 31, loans delinquent 30 days or more were 4.4% of the portfolio, compared with 6.3% a year earlier. Delinquencies at competitors Delta Financial Corp., Woodbury, N.Y., and Cityscape Financial Corp., Elmsford, N.Y., were 8.0% and 7.97%, respectively, for the quarter.
First Alliance enforces strict servicing policies, said chief financial officer Mark Mason. "We put people into foreclosure after they miss their second payment," he said. "They need to know that their home is at risk."