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Is This Lender Too Hungry For Its Own Good?


Finance: MORTGAGES

IS THIS LENDER TOO HUNGRY FOR ITS OWN GOOD?

Critics say Cityscape pushes loans on those too poor to borrow

Making big profits by lending to families with small incomes. That has been a winning formula for a sizable band of mortgage lenders who, enticed by fast growth and rich margins, cater to the so-called subprime market.

Perhaps the highest flier is Elmsford (N.Y.)-based Cityscape Financial Corp. Revenues have jumped from $49 million in 1995 to $199 million. Since 1995, it has securitized and sold some $2.7 billion in loans, mostly home equity ones. Its stock, 9/16 in 1994, reached a high of 36 7/8 last year (chart, page 150). Investor P. Michael Price, president of Short Hills (N.J.)-based Franklin Mutual Advisors, paid about $80 million last January for a 14% stake.

But Cityscape's heady days of rich profits may be numbered. On Aug. 4, Moody's Investors Service, for the second time this year, downgraded Cityscape's senior debt, from B1 to B2--largely because of questions about its loan delinquencies. Moody's analyst Thomas Foley questioned not only the high level of delinquent loans 90 days or more overdue but also the company's failure to foreclose or charge off overdue loans. Its stock is now trading at 13 3/4.

RISING COMPLAINTS. Cityscape CFO Tim Ledwick responds: "We don't necessarily agree with the reasons why Moody's downgraded us. Since we've been enhancing our operations, we've been addressing their concerns. We still believe fundamentally the business is very strong."

Problems in Cityscape's mortgage loan portfolio are reflected in rising borrower complaints in the U.S. and especially in Britain, where Cityscape received over 50% of its profits last year on 26% of sales. CMC, its British subsidiary and the largest player in the mortgage subprime market, has been under press scrutiny for aggressive lending practices, such as high early redemption fees. John Bridgeman, director of the British Office of Fair Trading, says such loan practices are "deceitful and oppressive." On July 14, Paul P. Flynn, a Labour member of Parliament, called for CMC's operating license to be revoked. And some 400 borrowers who claim they were abused by CMC are exploring a class action. Cityscape CEO Robert Grosser responds: "Everything we did in the U.K. was legal, and many other lenders charged early redemption fees as well."

TROUBLED RIVALS. Many analysts and investors continue to support Cityscape. "My outlook hasn't changed," says Ray Garea, Franklin Mutual's senior vice-president. Others have become wary. "Cityscape is taking an increasing amount of risk to generate substantially lower returns," says Tom Fasiola, an analyst with Lehman Brothers Inc. "I really doubt this company's long-term ability to survive." Says Grosser: "We feel very strongly about our products, our underwriting is very prudent, and we feel this will lead to longtime rewards for this company."

Cityscape isn't the only subprime mortgage company with troubles. Last year, the industry sold $27 billion worth of home equity loans, mostly subprime-- twice the 1995 figure. W. Criss Peters, a vice-president in structured finance at Moody's, says: "If you look at foreclosure rates, you can see they're skyrocketing."

Some analysts see parallels with the subprime auto-loan industry. Last January, the stock of Mercury Finance Co., one of the biggest players, dropped from 14 7/8 to 2 1/8 in two days after disclosure of overstated earnings and failure to adequately disclose loan losses. "I've seen this movie before, and I know how it ends," says Fasiola, referring to many subprime mortgage companies.

Unlike the auto-loan business, subprime mortgage firms rely mainly on brokers to generate loans. Various loans sold to Cityscape have been suspect. Grosser contends that some of the $130 million in loans Cityscape acquired from Parsippany (N.J.)-based Walsh Securities Corp. were fraudulent. Some independent brokers whose loans were financed by Walsh are being investigated by state and federal authorities for alleged mortgage fraud. "The amount of questionable loans Cityscape bought were diminutive," Grosser responds. "And Walsh has always lived up to their agreements, which would require them to repurchase any loans which turn out to be fraudulent."

One of Cityscape's major brokers is Jericho (N.Y).-based Coastal Capital Corp. Chairman Mitchel Gale is the former credit manager for a New York mortgage company called the Dartmouth Plan, founded by Gale's father, Melvin. A 1993 report by the New York City Consumer Affairs Dept. termed Dartmouth "the granddaddy" of "equity scams." A division of Dartmouth folded in 1990. The rest of the company became Resource One, which now sells loans to Cityscape. Says Mitchel Gale: "Coastal Capital is not an extension of the Dartmouth Plan...I run a clean business." Grosser says Coastal Capital and Resource One are completely reputable.

In the past two years, Cityscape bought $65 million in loans from British broker Capital Credit Ltd., according to owner Tony Murtagh. Murtagh was a director of his father's mortgage company, Richard Murtagh & Co. In 1989, the company's license was revoked for "deceitful and oppressive practices." Tony Murtagh declined comment. Grosser says: "We have a qualification process; the company obviously passed it."

When they took out a home equity loan financed by Cityscape in 1991, Mamie and Grover Belcher were oblivious to the company's background. The poor, medically disabled Mount Vernon (N.Y.) couple were just coming out of bankruptcy in 1991 when a home-improvement company persuaded them to take an $85,000 loan at 17.9% despite their low "D" credit rating. The Belchers never received a truth-in-lending statement and didn't understand the cost of the loan, according to their lawyer, P. Michael Anderson of Lenihan & Anderson in White Plains, N.Y. "Getting a Cityscape loan is like walking into quicksand, and they just let them sink," he says. In 1992, a bank initiated foreclosure proceedings. The Belchers are suing Cityscape for usury and fraud in a case expected to go to trial later this year.

Grosser says the Belcher case is unfortunate but not indicative of the company's overall loan quality. Whatever the merits of the suit, high-flying Cityscape continues to lose altitude.By Debra Sparks in New YorkReturn to top


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