High LTV Is Alive And Will Be Well AgainThe Mortgage PressHome Improvement Lenders Association, HILA, John LaRose
Despite the recent problems of FirstPlus Financial, United Lending and others, some mortgage
industry executives believe the market for High LTV lending will not only survive, but thrive
John LaRose, President of the Home Improvement Lenders Association (HILA) said there is
simply too much opportunity and too much cushion in the product for it to fade away like the
Cheshire Cat. While there likely will be some lowering of the top LTV rates, and a stricter
adherence to credit scores, a robust economy offers substantial protection for High LTV lenders
and investors, he said.
Mr. LaRose, who is also President of Compu-Link Loan Service, suggests that some of the
problems with 125 pools have been the result of inexperienced handling. "The fact is, these are
neither solid A-Borrower loans nor subprimes," he said, "and as such they need special handling
Some of the problems developed when borrowers began stretching FICO scores downward to
stay competitive in a frenzied market, Mr. LaRose continued. The difficulties were most likely
magnified by misguided servicing.
"The High LTV loan began life as a 'Title I lookalike,"' he went on, "which may be why some
people were inclined to service it like a subprime. Our experience is that 125 servicing is as
much art as it is science.
"Because foreclosure isn't much of an option, a servicer needs talented people who can
encourage delinquent borrowers to stay current, without threatening nuclear war," he said. "High
tech is important for servicing High LTV, but only when the technology supports the talent."
Mr. LaRose's assessment of High LTV's potential was echoed by Peter Rubenstein, Vice
President of the Global Asset-Backed Division at Chase Securities. The banker expects credit
quality in 125 pools to significantly improve over time.
"In its early years, the product behaves very much like a credit card with fairly high charge-off
rates," he said.
"The difference is that if home prices continue to appreciate, 125 LTV loans become under 100
LTV loans within five years. The you have both a good credit borrower and equity in the house."
Mr. Rubenstein also observed that the product is built to take very high losses. "With a spread of
600 basis points, it can absorb around 25% cumulative loss. Add to that 3-5% over-collateralization, with subordinate bonds on top, and there is a huge amount of protection for the
investor," he said.
Mr. LaRose contends that the future of High LTV lending would be greatly enhanced if the
industry were able to establish a grading standard similar to that in place for first lien loans.
"Investor's need to have confidence in the product they're buying," he said, "as it is now, one
lender's A-grade borrower is another's B+ borrower, so an investor can be disappointed when a
pool doesn't perform up to expectations."
The servicer said dependable grading standards would benefit all 2nd lien products, but could be
essential to the future of High LTV.
"Because these loans-at least in the early years-are largely unsecured, investors need to be able
to more precisely balance the risks and rewards. Then, when markets go south-like they did last
October-they will be less likely to cut and run."
Mr. LaRose noted that reliable grading standards would also help stabilize the market. "Buyers
of High LTV, both Mortgage Bankers and investors, would pay more sensible premiums for the
product than was the case during the frenzy last year.
Both Mr. LaRose and Mr. Rubenstein remain confident that there is a place for High LTV,
whose principal use is for debt consolidation.
The country has more than a half a trillion dollars in credit card debt, and another $1.3 trillion in
non-mortgage consumer debt. The 125 product has barely scratched the surface, Mr. LaRose
Mr. LaRose, President of HILA, can be reached at (800) 761-0073.