Having recently agreed to purchase the servicing rights of the FirstPlus Financial portfolio from Western Interstate Bank, Countrywide Home Loans, already a major player in the subprime home-equity sector, could be stepping into high-loan-to-value, said industry sources.
"The fact that they're going to be servicing these loans means they're going to be learning a lot about high-LTV in a very short order," said a home-equity analyst. "If they're planning to do it, this is the way do it. Overnight, they could become a powerful player in the 125-market, and if that were to happen, it would be very important news for the whole 125-industry."
Though the impact would be large, Countrywide's search for new products is not entirely unexpected, the analyst said. The refinance wave has dried up, and home-equity lenders have been looking for new ways to maintain volume.
"Countrywide has got into the subprime business in the past year more than they had before, and [high-LTV] is just a natural offshoot of that business."
Furthermore, since Residential Funding Corp. (RFC) is a major player in high-LTV right now, and Countrywide and RFC are tremendous competitors of each other, there's been questions for some time as to whether or not Countrywide would also try to develop a presence in the high-LTV market.
"Maybe what they'll do is use this servicing that they've bought as a way to learn about the product," the analyst said. "And then once they've dealt with it for a while, they'll say okay, this does make sense."
Countrywide had a brief stint in high-LTV prior to the liquidity crisis in 1998, but ceased origination when the bottom dropped out, and down went several overly aggressive home-equity/high-LTV lenders, including FirstPlus.
Currently Countrywide is aggressively marketing 97%-loan-to-value loans, said a spokesman for the company. Additionally, Countrywide offers an innovative 103% first-mortgage loan, which allows the borrower to finance the down payment and other related fees.
Liquidity for First Plus Investors
With Countrywide servicing the First Plus books, there should be some positive impact on the liquidity of the outstanding asset-backed paper, according to the research team at Prudential Securities.
"If I were the owner of these bonds I'd be really happy that this is taking place," said an ABS analyst (not from Prudential). "This is really good news for the people who own FirstPlus paper."
Though the servicing transfer could boost investor confidence, it's not likely to generate an upgrade scenario in the near term, said Shiv Rao, the analyst covering FirstPlus at Moody's Investors Service.
Though a servicing disruption or transfer could effect the transaction, when the ratings agencies (including both Moody's and Standard & Poor's Ratings Service) assign credit enhancements levels for protecting the transaction, they factor in the likelihood of a servicing transfer.
"In most of these [types of] transactions the servicers tend to be no- or low-rated entities, so even if they have good servicing capabilities, their abilities to actually survive the transaction through the end of the deal is questionable, as was borne out through FirstPlus," he explained.
"Here you've got a servicer with a better financial strength, but you still have to deal with a servicing transfer," Rao said. "And you still have to deal with a company that may not have the same direct expertise with these loans, that's not to say that they couldn't service them very well, but it's more of a wait and see situation for us now."
However, given Countrywide's expertise in servicing and originating a number of different types of loans - including CRA loans and FHA-VA loans, which tend to have high delinquencies - and given their financial strength, Rao said it would be unlikely that there would be any problems associated with Countrywide servicing FirstPlus loans.
"I don't think it will result in an automatic upgrade, but it definitely won't result in a down grade, or I'm pretty sure it will not result in a downgrade," Rao said.
However, if the collateral warrants it, the bond ratings on the subordinate tranches could see upgrades down the line, he added.