Word: subs
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...zoomed from about 10 companies in 1994 to some 50 participants last year. Giants such as GE Capital, Norwest Financial and Ford's Associates First Capital came barreling in alongside lesser-known newcomers. But the overcrowded field swiftly became unforgiving. For example, the market value of Mercury Finance, a sub-prime auto lender in Lake Forest, Ill., collapsed from $2.2 billion to $130 million last year after the company disclosed that it had overstated profits...
Such lenders were unable to navigate the economy's rapid crosscurrents. Even as defaults eroded profits, the booming economy has allowed some sub-prime borrowers to pay off their loans ahead of schedule. That has reduced income and ruined profit projections in many parts of the industry. Notes Daniel Phillips, chairman of FirstPlus Financial, a Dallas sub-prime lender: "No matter how conservative a lender's assumptions are, no crystal ball allows him to see what may happen...
...country and holds a whopping 30% of the lucrative market for financing mobile homes, making it the sector's largest lender. In addition, more than 90% of its $28 billion loan portfolio is secured by mobile homes, houses and other customer assets. Such backing is rare in the sub-prime industry and enables Green Tree to recover a relatively high proportion of losses when customers default on their payments. And despite problems such as the downgrading of much of Green Tree's debt by rating agencies, the company just declared its 46th straight quarterly dividend and expects to expand...
Like other sub-prime lenders, Green Tree makes a business of bundling up loans and selling them as packages of asset-backed securities to pension funds and other big investors. That replenishes Green Tree's capital and lets the lender make fresh loans and thus pump up volume, which grew...
...rest of the industry, it continues to face a painful shakeout. And fewer lenders could mean that rates for sub-prime borrowers will be heading higher. Even in prosperous times, this little-known corner of the financial world is likely to remain a risky business...