Considering Subprime?

Mortgage Banking, Oct, 2000 by MARY McGARITY

Having Full Spectrum's branches located near Countrywide offices makes referrals between the two divisions easy "We get a lot of people who call us who don't qualify for A loans, so we hand them over to Full Spectrum. We also have Realtors coming into our Countrywide offices with customers that the branch hands over to Full Spectrum. It's not the majority of business, but it's a nice amount," Lumsden says.

Countrywide has been satisfied with the performance of its subprime loans, according to Lumsden. While delinquencies are higher than in the prime loan portfolio, the loans have been priced accordingly. "As long as the loan performs [in line with] the risk you originally assessed it [at], you're OK," Lumsden says. "Clearly, common sense would tell people we're going to have higher delinquencies on the D portfolio than C-minus, C-minus will be higher than the C, and so on. As long as you perform versus how you price it, you're fine."

There has been a dramatic change in pricing in the subprime sector, however, Lumsden notes. "Twenty-five years ago, if you were a subprime customer and wanted to take cash out of your house, you went to a mortgage lender and often got what's called a 20/20 second mortgage. It was known as a perfect-vision loan-with a 20 percent interest rate and 20 points. Options were very limited," Lumsden says.

The securitization of subprime mortgages has helped define risk grades and loan categories, and the cost of these loans to consumers has come down substantially, according to Lumsden.

"Now there are tons of reputable lenders who have dramatically brought down interest rates. An individual today can get a 7 1/2 percent adjustable loan with 3 or 4 points, where six or seven years ago it would have been a 15 percent fixedrate loan with 5 or 6 points," Lumsden says.

Countrywide maintains a separate division for servicing its subprime loans. There is more communication with subprime customers, whose bill-paying can be inconsistent. "We're not talking anything crazy, like 20 or 30 percent delinquency rates-the majority of these people make their payments," Lumsden says. Most of the communication is done over the phone.

Countrywide plans to begin offering the very top tier of subprime product for purchase transactions in its Countrywide retail branches later this year. "We now have five years of experience with this type of product," says Lumsden. "We have experienced subprime people within the company that we can move to [Countrywide's prime lending branches from the Full Spectrum branches]. And our branches out in the local communities need to be able to offer what the Realtor and the consumer need, which I believe is A-minus credit."

The Chase advantage

Chase Manhattan has steadily increased its presence in the subprime sector since its entrance in late 1994. In 1995, Chase did $100 million in subprime loans; in 1996, $300 million; in $700 million; in 1998, $1.5 billion; and in 1999, it did $3 billion in subprime loans, according to Cooper.