Considering Subprime?

Mortgage Banking, Oct, 2000 by MARY McGARITY

Conservative underwriting is behind the solid performance of Chase's subprime loans, according to Cooper. How is the company able to compete? "I'd much rather compete on price for the loans I want, because when you compete on price you know exactly what you're giving up. I don't want to compete on credit," says Cooper.

Margins in the subprime sector have been squeezed over the last year and a half, but the business remains profitable for Chase, Cooper says. "As you bring liquidity and consistency to a market, you bring conformity. Conformity makes it more of a commodity type of product," he says. Up until the market shakeout in late 1998, the valuations of subprime companies were grossly overvalued and companies were overpaying for loans, according to Cooper.

Like Countrywide, Chase considered acquiring a B&C company, but opted instead to build a subprime division from within. "We actually looked pretty aggressively over the last couple of years, but at the end of the day we couldn't see it. We already had the infrastructure in place and we already had the management in place. It seemed to us that the premium was extraordinarily high for what you got. It always came down to the fact that there were 10 salespeople that we wanted. Why buy an entire company when you can just hire the 10 salespeople that you really want? It was a lot cheaper," Cooper says.

Starting out slowly

InterFirst Wholesale Mortgage Lending is getting its feet wet in the nonprime market by expanding into the Aminus segment, according to the company's president, William Newman. InterFirst, a division of Chicago-based ABN AMRO Mortgage Group, started buying A-minus loans in January, and as of late June that product accounted for about 6 percent of its business.

"There's no question we're getting into it to remain competitive. Everyone's trying to expand their product line," Newman says. "We tried to make it as similar as possible to our A process for our lenders and brokers, so they could use the same people and the same processes to submit A-minus paper," Newman says. Eighty percent of lnterFirst's business comes from brokers; 20 percent comes from correspondents.

Fannie Mae's and Freddie Mac's entrance into A-minus paper was partly behind InterFirst's decision to branch out.

"With the agencies getting into A-minus, especially because we use their automated underwriting, it's fit in really well with our strategy of keeping things low-cost," says Newman. "We decided we could present it in a manner that looked very similar to our A business."

In fact, InterFirst worked with both Fannie Mae and Freddie Mac to develop its underwriting standards for A-minus loans. "We feel like we're pricing at appropriate margins to handle the operational and servicing risk--we know it's going to cost a little bit more to service these loans. We will definitely be more aggressive in the servicing," Newman says.

Nonprime, not subprime

Joseph Parker, executive vice president of National City Bank, is careful to draw a distinction between subprime and nonconforming (or nonprime). "We don't do subprime," Parker says. "We do nonconforming or nonagency loans--which, in our mind, is very different." National City bought First Franklin Financial Companies, a San Jose, California-based nonprime wholesale mortgage lender, in the fall of 1999. National City purchased Pittsburgh-based Altegra Credit Co., an investor in nonprime assets, in 1996.