ALH Capital, Inc.
In 1997, Arch Williams founded ALH Capital, Inc. with the goal of providing vastly more liquidity in the second-mortgage market. Based on his years of experience in the mortgage industry, he knew that leaders often could not offer mortgages to highly deserving credits because of the fragmented nature of the second-mortgage market. ALH is now offering a solution to nearly fifty leaders, greatly expanding their market capacity.
In implementing the concept, ALH Capital, Inc. conducts two major business activities:
The ALH second mortgage has widespread acceptance and commands a high interest rate because it routinely accepts loans with high loan-to-value ratios for most residential property types and with the borrowers unverified statement of income. To offset these non-conforming factors, the borrower must possess a good credit history as measured by the Fair-Isaac (FICO) credit-evaluation system. Since acceptable level FICO scores are predictive of credit-risk levels, loans made to such borrowers perform well and can be viewed favorably by the potential investors who buy from lenders. Consequently, originating mortgage lenders may increase both their volume of first mortgages and their profitability by making ALH second mortgages in conjunction with the first mortgages.
The Mortgage Bankers Association of America (MBA) estimates that mortgage originations in recent years have averaged $1.2 - $1.4 trillion annually. In 1998 the National Home Equity Mortgage Association estimated that second mortgages totaled over $500 billion. ALH Capital informally conducted interviews with wholesale mortgage lenders to determine their perception of the ALH second-mortgage loan. Some estimated they would be able to make up to 30% more first mortgages if they could make and sell a second mortgage with the characteristics of the ALH second-mortgage loan. If ALH could capture even a conservative 2% of this $500 billion market, there would be $10 billion of its type of second mortgages available. As a practical matter, then, the potential size of the market is large enough to render moot any concerns about finding and maintaining an adequate supply of loans.
ALH Capital enters correspondent relationship with lenders and purchases loans from them on a flow basis for its own account. The loans are then placed with a servicing organization, which performs all the routine record keeping and collection activities on each loan. Normally, ALH buys loans from the originating lender at par or a slight discount. The typical loan is about $30,000 in size, while the borrowers usually have FICO scores averaging 680. Fair-Isaac studies predict loans with a 680 score have a default rate of .4% or less over the life of the loan.
Domestic investors are usually attracted by the high yield and the predictable performance of the loans. International investors have interests similar to those of domestic investors. In addition, they obtain an investment vehicle providing a monthly return in U.S. dollars that also hedges against local currency instability and inflation. ALH loan packages are sold at a premium, the level of which is determined by the characteristics of the loans in the package.
ALH Capital enters forward commitment agreements with investors to provide specified volumes of loans over a period of time. Packages of loans are normally delivered monthly or quarterly, in accordance with the investors desire. At the investors preference, the on-going servicing of the loans can either be retained by ALH Capital or released to the investor.
Profit margins for the business model are quite attractive, and
volumes can be expanded dramatically without a commensurate increase in operating
expenses. ALH Capital has been profitable
since its start up.
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