High-loan-to-value lenders are angling to make a comeback, with banks and other investors replacing hedge funds as buyers of their securities.
The market for securities backed by high-loan-to-value mortgages fell apart last fall when investors lost their appetite for asset-backed debt. The largest high-LTV lender, FirstPlus Financial, ran into trouble and eventually filed for bankruptcy protection in January.
Now, however, Wall Street sources say they are seeing a resurgence.
Empire Funding Inc., an Austin, Tex., affiliate of Contifinancial Corp. is scheduled to bring a $250 million deal backed by high-LTV loans to the market this week. The deal will be led by PaineWebber. DiTech Funding Corp., an Irvine, Calif., high-LTV lender that was bought by General Motors Acceptance Corp. this year, is also said to be bringing a deal to market that PaineWebber would lead.
Goleta National Bank, Costa Mesa, Calif., is introducing a $100 million deal that will be led by Prudential. And Residential Funding Corp., a division of General Motors Acceptance Corp., priced a high-LTV deal last month. The deal was insured by Ambac.
The controversial loans-second mortgage or home equity loans that allow homeowners to borrow more than the value of their homes and use the extra cash to pay off their higher-cost debt-were among the hottest new products in the mortgage market until the liquidity crunch hit.
"What you're seeing is a testing of the waters," said Gordon Monsen, a specialty finance investor. Mr. Monsen left PaineWebber in 1997 to enter the high-LTV market.
Many of the hedge funds that were the principal buyers of high LTV- backed securities, especially subordinate tranches, bowed out of the market in the fall when they experienced liquidity problems, Mr. Monsen explained.
Now, banks and other investors are emerging as the principal buyers, he said.
High-LTV loans have lower losses than subprime loans, and provide investors with higher spreads, Mr. Monsen said. "It doesn't seem to be much of a brain teaser" why there would be demand for the debt.
Mr. Monsen acknowledged that some of the first high-LTV securitizations, dating back to 1996, have shown higher-than-expected losses. But he said high-LTV lenders have tightened credit standards and enforced much higher disposable-income requirements. Loans originated in the past few years will probably perform better, he said.
Mr. Monsen estimates consumer demand for high-LTV loans at $15 billion a year.
The lower quality tranches of high-LTV securitizations remain difficult to sell, even as the market improves overall, Mr. Monsen added.
"You have to reestablish that market," he said. "More creative deals are necessary."