In an earnings conference call last week, David Schoenholz, chief financial officer at Household Finance Corp., said the company will beef up its securitization of real estate loans this year, which HFC sees as its largest area of portfolio growth in 2002.
The statement was partially in response to Fitch changing its outlook on HFC and all Household International entities from stable to negative. This followed an expected downgrade of HFC to A from A+, aligning its rating with the parent company, which reflected a policy change at the rating agency. That Fitch placed Household on negative outlook "was a really big surprise," Schoenholz said.
In Fitch's analysis, however, the rating agency felt that HFC's relatively low-level of real estate securitization activity fails to adequately demonstrate its accessibility to that market.
"They feel that post Sept. 11, and post [Enron Corp.], capital markets have become much more volatile, and market disruptions become a bigger potential risk," Schoenholz said. "Against that backdrop, Fitch would like us to demonstrate a more active securitization program for real estate secured loans, to demonstrate them as a potential backup source of liquidity in the event of a market disruption which might restrict our ability to borrow."
Last year HFC brought two home-equity deals, for about $1.5 billion in proceeds. In the same time period, HFC grew its real estate secured loan portfolio approximately $8.7 billion to $43.856 billion, a 24.7% year-over-year increase. Real estate accounts for approximately 55% of HFC's $79.9 billion owned receivables portfolio. The company services an additional $21 billion in un-owned, limited recourse receivables, which brings its managed portfolio to just over $100 billion.
According to Thomson Financial, HFC has brought about $15 billion in real estate ABS since its first deal in 1989, roughly equal to what the company has done in credit card ABS (via both private label and Visa/MasterCard accounts), which makes up about 25% of HFC's owned portfolio. Since 1999, HFC has only securitized roughly $2.75 billion in real estate ABS, compared to the $4.2 billion in cards and $4 billion in autos.
Notably, HFC has been hesitant to push real estate ABS because it prefers to avoid the upfront accounting gain. That said, HFC structured both 2001 deals so that they would not qualify for sale treatment, and intends to continue this strategy going forward, the company indicated in its earnings call.
Household reported its 14th consecutive record quarter, with net income reaching $549 million.