WSLB Time Machine -From the Horse's Mouth? Fascinating 1994 Report on Subprime MBS From The Firm That Coined the Term Securitization.
MAY 1994
May 1994
B and C lending is aimed at residential borrowers who are denied access to traditional first mortgage financing because of tarnished credit histories or higher debt-to-income ratios. As a result, B and C borrowers pay above-market mortgage rates to compensate for increased credit risk. However, most of these borrowers are homeowners who have sufficient equity in their properties to borrow at below-market loan-to-value (LTV) ratios. For example, the average LTV for a traditional, nonconforming ARM is about 75%, compared with 65% for recently securitized B and C ARMs. Therefore, with substantial equity at risk, these borrowers should have a powerful incentive to repay their mortgages to avoid forfeiting equity in a foreclosure proceeding. Lending that relies strictly on borrower equity is commonly known as equity-based lending. In contrast, current B and C programs rely primarily on borrower equity to minimize default risk, in conjunction with an underwriting process that categorizes and then
prices the riskiness of each borrower.
First-Lien Mortgage Bankers
In this report, we focus mostly on three first-lien B and C mortgage bankers:
Long Beach Federal Savings Bank, Quality Mortgage USA, Inc. and
Option One Mortgage Corp.Long Beach Federal Savings Bank is a Federally chartered savings bank whose principal business is mortgage banking. Long Beach has been in the B and C lending business since the late 1980s. Since 1992, MBS totaling $1.7 billion have been issued with Long Beach acting as the primary and master servicer.
Quality Mortgage USA, Inc. is a California corporation acquired by CALMAC Funding (also a California corporation) in 1991 for the purpose of originating and selling B and C mortgages. In addition, DLJ Mortgage Capital has exercised an option to acquire a 49% interest in Quality Mortgage. Quality’s loan originations began in January 1992 and have collateralized $1.4 billion of MBS. Lomas Mortgage USA, Inc. acts as primary and master servicer.
Option One Mortgage Corp. is a subsidiary of Plaza Home Mortgage, a holding company with subsidiaries that also include Plaza Home Mortgage Bank, a California savings and loan/mortgage banker, and Plaza Home Mortgage Servicing, a mortgage servicing company. Option One was founded in 1992 with a primary business line of B and C lending and originated its first loan in February 1993. To date, Salomon Brothers has underwritten two Option One MBS totaling $165 million. Plaza Home Mortgage Servicing acts as servicer for Option One originations.
Other B and C Lenders
Traditional second-lien lenders also are active in the B and C mortgage market. The major players include Advanta, Alliance Funding Corporation (AFC), Old Stone Credit Corporation (OSCC), and The Money Store (TMS). As a group, these issuers sold approximately $2.7 billion of B and C securities in 1993.
Although these finance companies are thought of as home equity lenders and their securities are considered home equity asset backeds, in fact, first-lien mortgages comprise up to 90% of some pools.