Magazine article American Banker

Finance Company Crises Threatening Loan Pools

Magazine article American Banker

Finance Company Crises Threatening Loan Pools

Article excerpt

The crises at Mercury Finance Co. and Jayhawk Acceptance Corp. are stirring fears that lenders may start abandoning voluntary support of the asset-backed securities they sell on Wall Street.

So far, high-profile lenders have stood by the $360 billion of securities that were packaged from their home equity, auto, and credit card loans. Indeed, executives at First Chicago NBD Corp., First Union Corp., and Mercantile Bancorp. said that in the past year they have bought back badly performing loans or added higher-quality assets or premiums to improve pool performance.

But concern is rising that marginal lenders could be more reluctant to prop up their loan pools, casting a pall on the whole market.

"It is likely that some (lenders) faced with deteriorating asset pools will not support their transactions in the future," said Andrew Silver, a managing director with Moody's Investors Service.

The cost of assisting these pools could become too great, Mr. Silver said. And, in a domino effect, the stigma of not supporting loans could disappear as more lenders decide to pull away, he said.

Without the voluntary assistance, some securities would likely face downgrades or defaults, costing investors million of dollars.

The prospect of causing such upheaval is enough incentive for most, but not all, lenders to keep up the support, experts said.

"When push comes to shove, some people will care more about their name in the market than others do," said William G. Ferrell, chief executive of Ferrell Capital Management, a Greenwich, Conn., trading firm.

If some lenders do back away, it won't be the first time the industry has shied away from providing more assistance than is contractually required, experts said.

In the early 1980s, lenders frequently shored up mortgage loan pools to counter deteriorating credit quality. But by the end of the decade, many decided the costs of trying to offset declining performance exceeded the benefits, Mr. …

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