Considering Subprime?

Mortgage Banking, Oct, 2000 by MARY McGARITY

First Franklin differs from most subprime lenders in two regards, according to Parker. The average credit characteristics of the loans First Franklin does are significantly better than those associated with traditional subprime loans, he says. For instance, Parker says, the average FICO score on First Franklin's loan portfolio is about 645 or 650. "If you take a look at the subprime securities that are being issued today, they range more in the 580 area," he says.

In addition, the vast majority--90 percent or more--of the nonconforming business First Franklin does is purchase-money mortgages, as opposed to cash-out refinances. "If you look at the subprime industry, the majority of the business is cash-out refis," Parker says. Sources interviewed for this story estimate that at least 70 percent of subprime lending is cash-out refinances, with the remainder purchase-money mortgages.

National City sees expanding into nonprime mortgages as an important part of its future, according to Parker. "We view these as very attractive assets, with good risk-adjusted spreads. We've made a significant investment in this segment and think it's something we can grow and be very profitable in over the next couple of years," he says.

The earnings in nonprime lending are the main attraction, says Parker. "Obviously, it also helps us meet a larger percentage of customers' requests for mortgage loans. If you just do conforming, that is somewhat of a narrow box that has been defined by Fannie and Freddie. We're able to help more of our customers by lending outside that box with still very attractive credit characteristics. These are folks that have had minor issues in the past, and we think we can make a very good case to get a very good mortgage loan at a very good rate," Parker says.

National City intends to grow its nonprime business over the next three years, and "my sense is it will be internal growth," rather than company acquisitions, says Parker. "The absolute dollar amount of earnings in this segment will grow for National City. The margins for the business will continue to be squeezed, just like the conforming margins are being squeezed, but it's still a very attractive return on equity or capital deployed," he says.

At this time, National City does not have plans to go into what it considers subprime lending, Parker says. "We won't because of the credit risk--it's a little deeper than we want to go," he says.

National City holds about 70 percent of the nonprime loans in portfolio, and sells the remainder on a whole loan basis to investors. Altegra services the loans held in portfolio, according to Parker.

First Franklin will originate $4 billion to $5 billion in mortgages this year and Altegra $2 billion, Parker estimates, which is within National City's expectations. "Like everyone else, we've been impacted by rising interest rates, but it would be our expectation to get steady growth out of these businesses," he says.

There are active referrals between all the units within National City, according to Parker. If a borrower does not qualify for a conforming mortgage in the bank's retail branch network, the lead will be passed to Altegra to review for a nonconforming mortgage. "We fundamentally look at what's the best thing for the consumer. If the loan doesn't have value for the consumer, we just don't make that loan," says Parker.