Abstract: Coveted openly by a few, secretly by many, these ultra-high LTV loans have also caught the eye of the IRS It was truly like finding money in the street, John Koch, executive vice-president of Charter One Bank, says of the $75 million profit it made from four months of brokering 125% loan-to-value, subprime mortgages. hank had been offering its prime customers since mid-1996. Then in September, it began originating for subprime customers (typically A- or B+ customers), through a subprime subsidiary bank established a year ago. prime are held in portfolio while the subprime ones are promptly sold. Koch says the bank typically gets four points in fees per subprime loan originated, which is intriguingly profitable, says Koch, considering the bank doesn't even fund the loans. Charter One is typical in selling its loans servicing-released, for better fees. There is often relatively little documentation on 125s, a type of second mortgage, typically used for debt consolidation. Timothy O'Neill of First Indiana Bank, Indianapolis, which acts as a conduit for I 25s, says, Closing is simple. For instance, There's no escrow because there's no seller. His bank does not even ask for an appraisal if the second mortgage is under $6 (There might be a $90,000 first mortgage-at 90% LTV-plus a $35,000 second mortgage on a property worth $100,000, for example, bringing the combined LTV to 125%.) First Indiana's typical second mortgage is for $32,000, with a combined LTV of 112%. term has come to describe a category of second mortgage where the loan is for more than the property is worth, but the range currently goes from 101% to 149%. O'Neill points out also that many first mortgage programs are heading for 100% LTV, but not beyond that- we're not going to pay people to buy a home, he says. That lenders allow borrowers to estimate the value of the property may seem strange enough. However, John Craig, III, senior vice-president of PAMEX Capital Partners, LLC, explains, Despite the borrower's perception, we look at these 'mortgages' as unsecured lines of credit. Conversely, if a consumer compares the 125 rate, not to mortgage rates, but to credit-card rates, Craig says, 12% or 13%, looks better than 18% or 20%. Craig's Alpharetta, Ga., firm brings together makers of, and investors in, 125s. It started last August and now buys $13 million a month in from ten institutional originators, including commercial banks. First Indiana reports relatively few bank clients in what is, as yet, mostly a mortgage broker/mortgage banker market. Banks and thrifts are afraid of this product, says O'Neill, adding, 1 don't know of anybody doing as a portfolio creator of the 125, Randy Pool, now assistant vice-president of sales and marketing with Money Store, says he doesn't believe it buys from any commercial banks (Pool's comments were made before First Union Corp. announced it was acquiring Money Store). Of those that have had discussions with Money Store, Pool says, The banks want a very high level of assurance that, should they originate 125s, they can sell them immediately. As for Charter One bank, Koch says, My only concern is that I'd like to write more paper. That's especially true of the prime it makes through the bank (subprime loans are done in a subsidiary). Losses on prime have been minimal since mid-1996, Koch says, but so have origination's, at less than $1 million. However, he says volumes are increasing every month, and will be boosted by a new marketing campaign. Subprime or not? O'Neill says, 125s must be marketed differently. They need some kind of triggering event. Brokers do a lot of TV advertising of 125s, a product most consumers might not expect from a bank. Part of this may stem from a misperception that are a subprime product. Pool, who designed the 125 while at First Plus Financial, Dallas, says, The typical 125 customer is a prime, not a subprime customer. …
Publication Year: 1998
Publication Date: 1998-04-01
Language: en
Type: article
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