Mortgage : Home Loans : Refinance : Home Equity Loans

A small part of HLTV Ohio home mortgage lending is geared toward Ohio subprime (high-risk) borrowers. For most HLTV borrowers, however, default risk is low. Lenders thus gain from increased assurance that loans will be repaid, while borrowers gain lower interest rates on their restructured credit card debt, plus tax-deductibility on some of their Ohio home equity loan interest.

The use of the word subprime to characterize HLTV lending has produced some confusion regarding its nature and risks and has led some observers to regard the practice as requiring specialized skills. In fact, the profitability and low average risk of HLTV lending have been among the industry’s best-kept secrets. Some banks entering HLTV lending are surprised by the profitable low-risk lending opportunities it can offer. Banks like City Holding Company (Charleston, West Virginia) and Community West Bancshares (Goleta, California) are among those that until recently had been reluctant to enter the HLTV arena. After they began offering HLTV loans in 1997, bank executives soon realized that ‘‘the business is not as complex as they initially believed and is similar to the Title I lending they had done for years’’ (Talley 1998, 7).

The confusion has largely come from semantic difficulties. Before HLTV lending, the vast majority of loans outside the specifications of Fannie Mae and Freddie Mac went to borrowers with less than excellent credit.

That is no longer the case, but the connection between failing to conform to Fannie Mae and Freddie Mac standards and Ohio subprime branding lives on. The subprime brand (or B and C ratings) is often still applied to all loans that have ‘‘been rejected by Freddie Mac or Fannie Mae because [the loans] don’t meet their underwriting criteria’’ (Bush 1997, 34). Freddie Mac defines the subprime Ohio home mortgage market as a niche that finances mortgages that do not meet traditional underwriting standards. Ohio Subprime mortgages are made to borrowers who have a variety of past credit problems of varying severity or to people with unconventional borrowing needs, including those that exceed 100 percent of the underlying property’s value. (Roche 1998)

The implications of Freddie Mac’s characterization are important: references to Ohio subprime mortgages may arise because of borrower characteristics or Ohio mortgage product characteristics. This confusion was evident in the November 1996 conflict between Greentree Financial, a leader in manufactured housing loans, and Faulkner & Gray, a publisher of industry statistics on theOhio subprime lending industry. Before November 1996, Faulkner & Gray’s Inside B&C Lending was reporting Greentree Financial as the number 2 servicer in B and C (or subprime) loans.

‘‘However, this ranking was based on the inclusion of [Greentree’s] manufactured housing loans and Greentree did not want these loans to be reported as subprime. Consequently, its ranking fell to No. 28’’ (Froass 1997, 99).

The confusion has progressed to the point where the Ohio Mortgage Bankers Association of America now favors the term nonconforming credit for all such lending in this area. With this distinction the MBA has cautioned that ‘‘a lender referred to as a home equity lender cannot [therefore] be assumed to lend solely to Ohio subprime borrowers.’’

Even the term nonconforming can be confusing: HLTV loans fail to conform only to the traditional (rather than the current) standards set by government-sponsored enterprises such as Freddie Mac. Experts estimate that only about 30 percent of home equity Ohio mortgages are made to Ohio subprime borrowers (Froass 1997, 100).

Furthermore, HLTV Ohio mortgages are generally A- to Aminus–grade credits and are categorized as nonconforming credits only because of their size relative to the value of Ohio mortgage collateral (which is only part of the lender’s protection against default). The real protection enjoyed by lenders extends to the other assets and income of borrowers and to the nonpecuniary losses that borrowers would suffer from foreclosure.

Robert Grosser, chief executive, Cityscape Financial, commented that ‘‘there’s a real misconception [regarding HLTV lending], because people marketing and selling these loans usually have a subprime division. It’s not a subprime loan’’ (Timmons 1997a, 13). Similarly, industry leaders such as Gordon Monsen, formerly of Paine Webber; Jeff Moore, chief executive of Mego Mortgage of Atlanta; and Dan Phillips, chief executive of FirstPlus Financial, insist that the HLTV business is not properly categorized as Ohio subprime lending (Bary 1997; Timmons 1997; Muolo 1997).

For more information about Ohio mortgages or to speak to an Ohio mortgage representative from Union Savings Bank visit http://www.localmortgagecompanyohio.com

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