Magazine article American Banker

Home Equity Bonds May Include Some Junk, Raters Warn

Magazine article American Banker

Home Equity Bonds May Include Some Junk, Raters Warn

Article excerpt

Not all home equity securities merit the title.

That's because Wall Street firms have increasingly been putting other, riskier assets into securities that are composed primarily of second liens.

The securities are known among second-mortgage lenders as "kitchen sink" bonds. And they have some credit watchers worried.

The most recent - and controversial - asset making its way into home equity securitizations is mixed-use loans. These loans are made on properties that have both a residence and a business.

One example of a mixed-use property is a deli with an apartment on the second floor. Loans on such properties are considered riskier than those just on residences.

Prudential Securities Inc. has put mixed-use loans into a few securities since the fourth quarter of 1994, said Len Blum, a managing director at the New York-based investment house.

Mr. Blum said using different assets in a security "brings diversification" to the bond. He said it was especially helpful when there is not much history on which investors can base their decisions.

The Money Store Inc., Sacramento, Calif., and Contimortgage, Horsham, Pa., are said to be including novel assets in their securities.

Title One loans, generally home improvement loans backed by the FHA, and mortgages on manufactured homes have also been included in equity securitizations.

Catherine E. Needham, managing director, Moody's Investors Service Inc., New York, is troubled, especially by the mixed-use properties. …

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