|High-risk lenders battered
by market turmoil
Southern Pacific Funding Corp. FirstPlus Financial
Group Inc. IMC Mortgage Co. Criimi Mae Inc. The list of casualties
in the nontraditional lending industry is getting longer with each
Each of these companies dabbled in different
areas. Southern Pacific and FirstPlus originated and sold high loan-to-value
equity loans. IMC Mortgage Co. offered high-risk, subprime loans.
Criimi Mae bought securities comprised of commercial, rather than
All have been battered by ongoing market turmoil.
Goes around, comes around
Now, the same industry that has been pushing high loan-to-value
(LTV) home equity loans -- which some consumer advocates warn can
lead people to bankruptcy -- is finding itself in the same boat
as its customers.
Southern Pacific filed for Chapter 11 protection
a few weeks ago, as did Criimi Mae. FirstPlus said Oct. 15 that
it was firing 3,000 employees (half its work force) and leaving
the high-LTV, wholesale home equity loan origination business. The
next day, IMC Mortgage said it had secured temporary financing to
keep it afloat while it looks for a buyer.
"I've been in the business about 25 years, and
I haven't seen anything quite like it," says Jeffrey Zeltzer, executive
director of the National Home Equity Mortgage Association. "You're
talking about a very, very fluid situation."
The problem stems from trouble on Wall Street. Typically, home equity
loan companies treat their product the same way traditional lenders
do. They package groups of loans to form securities, which are sold
through investment bankers to mutual fund companies and others.
While securities backed by traditional mortgages are called "mortgage-backed
securities," securities backed by home equity loans are referred
to as "asset-backed securities."
Ever since Russia defaulted on its debt this
summer, investors have become increasingly risk-averse and have
drifted away from asset-backed securities and toward more conservative
securities, including short-term Treasury bills and notes. That
has made enough of a difference in the market that hedge funds have
taken it on the chin. The funds are operated by investment companies
that cater to the rich and use their money to place bets on the
direction of markets. They are heavy buyers of asset-backed and
other non-Treasury securities.
In the end, that means home equity and subprime companies can't
raise enough money for loans because fewer hedge fund buyers and
others are stepping in to grab their bundled mortgages.
"The liquidity in the marketplace is not as
great as it was five months ago," says Mark Hikel, the former president
of Southern Pacific's Indianapolis-based subsidiary that originated
What does this foretell for people who might want 125 percent home
equity loans in the future?
"(The) 125 is a product that is going to slow
down," Zeltzer says. "Even though there's going to be a strong demand
for the product from the consumer, I think the sources of funding
are going to slow down. That product that is in place is going to
become more expensive to the consumer."
Hikel says the industry itself is to blame.
"The problem with the product since its inception is that it's gotten
too aggressive ... Loan amounts probably went too high, debt ratios
went too high."
The loans "are going to be reengineered, reinvented."
--Posted: Oct. 28, 1998