Considering Subprime?

Mortgage Banking, Oct, 2000 by MARY McGARITY

Countrywide welcomes the entrance of Fannie Mae and Freddie Mac to the subprime sector, but Lumsden believes any moves the two agencies have made so far have been minuscule. "They're truly following the tiptoe strategy- they're not taking any large steps right now. But we would love for them to get more into the business," he says.

Both Fannie Mae and Freddie Mac have defended their entrance into the subprime market. "We hope to bring costs down in this business segment by bringing more competition and bringing rates down, because we think it's the right thing to do," says Faith Schwartz, director of subprime markets for Freddie Mac. "We believe it is part of our mission to bring more credit availability to this segment of the market," she says.

By bringing more standards and lower costs to the subprime mortgage industry, "we think both consumers and lenders will benefit tremendously," Schwartz says.

Building from within

Countrywide Home Loans began its foray into subprime lending in 1995 through its wholesale business. "Mortgage brokers are big originators of subprime, so we began doing it on a wholesale basis with brokers. We got comfortable with it and decided to do it on a retail basis," says Lumsden. Branching into nonprime mortgages was very appealing because it's profitable and it allows Countrywide to reach more borrowers, he says.

Was it ever a consideration to buy an existing B&C lender? "We're shown deals all the time. But at that time-1996- those companies were beginning to sell at very unrealistic multiples. The subprime companies were already starting to look very good to people, and they were very expensive," Lumsden says.

Instead, Countrywide opted to bring in experienced subprime originators, underwriters and processors, and it built a subprime unit internally called Full Spectrum Lending. "We're very comfortable building. Even as we started building, we kept looking at companies to buy and they kept going up and up in price. I don't think any of the purchases that were made then have been successful to date," Lumsden says. "Our strategy was the correct one. We looked at The Money Store, for example, and First Union took a huge loss on that one. We know how to research, negotiate leases and hire people. So it was natural for us to build from within."

Countrywide decided to keep its subprime business largely separate from its existing retail business, with most of the Full Spectrum branches located separate from but near Countrywide branch offices that do prime lending. "We decided that it's a different customer requiring different marketing. We didn't want to confuse the credit-challenged individual by having them think they could come to Countrywide-we felt that a different brand would be easier for communicating with these customers. So we created Full Spectrum," Lumsden says.

Countrywide also keeps its subprime business separate from its A-lending business for processing reasons, according to Lumsden. "These loans flow differently-I felt we needed experienced subprime people to handle them, which we hired a ton of. I didn't think we could be successful just sort of dropping a product into our existing retail division," he says.