With the market exit of two more high-loan-to-value (HLTV) home-equity lenders, the maturing sector, now dominated by large, well-financed companies is coming into its own.

Specialty finance companies who would be entering the sector are beginning to realize that it is difficult to stay afloat due to lack of buyers for their loans, sources say. Atlanta-based Altiva Financial Corp. recently quit the business and fired 90% of its staff due to poor liquidity for their loans.

"A lot of these companies started a few years back when the market conditions were a lot more favorable," explained Brian Quinn, an analyst at Duff & Phelps Credit Rating. "They could securitize and enter the business without having a lot of capital through structured deals to fund the paper longer term."

"When companies like First Plus Financial Inc. left the market, larger players like Residential Funding Corp. stepped in to fill the gap," added David Teicher from Moody's Investors Service. "In general, in the home-equity market over the last couple of years we've seen better capitalized companies doing better in the market."

That and other issues have been the cause of the no-win sector for some.

Several market issues such as gain-on-sale accounting can be held accountable for changing the dynamics of the market.

With gain-on-sale accounting, Quinn said, issuers were recognizing the gain from the securitized assets upfront. The gain was based on the company's future expectations of performance for the pool, which is a misrepresentation of current revenue levels.

Gain-on-sale is just one concern that caused a reduction in confidence in the sector, in turn forcing out the specialty finance companies. The other concern was the liquidity crisis that hit the home-equity sector in late 1998. Those two factors, Quinn feels, created a "flight to quality": enter RFC.

"I don't think that we have ever recovered [from the liquidity crisis] and I don't think that we will ever recover to the levels that we were at prior to the liquidity crisis," Quinn said.

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