What will '97 bring to sub-prime lending industry?

Real Estate Weekly, Jan 22, 1997

Growth, But With a Limit

The year 1997 will bring continued growth to the sub-prime lending industry, but not at the pace its players have become accustomed to over the last three years. "Our industry has been through a boom cycle, with originations approaching $12C billion," says Cooper. "No industry can or should sustain that level of growth, but the-trend will still be positive during the next 12 months."

Slowdown in IPOs

Last year, Wall Street was very enthusiastic about IPOs for sub-prime lending companies, with 12 companies going public. In 1997, the market will take a more realistic approach to the earnings of these companies and slow down on the number of IPOs for sub-prime mortgage companies.

"The difference between 1996 and 1997 will be that sub-prime lending companies will not automatically be considered golden investments that do not need further analysis," says Cooper, whose background includes working as an institutional broker for Shearson Lehman Brothers in trading mortgage-backed securities. "Next year, Wall Street will recognize the difference between a well-managed sub-prime lending company and those unable to manage the growth of their originations and delinquencies."

Increased Rate of Mergers and Acquisitions

Expect an acceleration in mergers and acquisitions as larger, better capitalized companies try to acquire production by buying mid-level regional sub-prime bankers. "These lenders want to be in this market so badly that they are willing to pay handsomely for these companies," observes Cooper. "Now that deregulation allows banks to get into non-traditional lines of business, look for them to take over sub-prime lenders. Also, watch for a significant money-center bank to acquire a major player in the sub-prime market." He cites as forerunners of this trend recent acquisitions by Conti Financial Corporation and United Financial Companies.

Retail to Heat Up

Watch for intensified competition on the retail side of the sub-prime lending market in 1997. "This will be the year that lenders who previously concentrated on wholesale will look to diversify their businesses by moving into direct retail operations," says Cooper. "You may see lenders going after consumers directly using such media as direct mail, advanced telemarketing, television and radio. These lenders will now be competing with small bankers and brokers who had the 'lock' on the retail aspect of our business up until now."

Technology to Define Success

Next year will bring a continued explosion in the use of technology as the defining element in differentiating what Cooper calls "The Haves" from the "Have Nots."

"Those who made technology a financial priority will re-define success in this industry," he says. "Information technology and state-of-the-art communication are the buzzwords for those of us planning to succeed in this competitive market. And, the technological growth will expand to new areas. You can anticipate growth in the number of Web Sites to attract consumers and the continued sophistication of automated underwriting and computerized mortgage scoring."

Hot Products

More products to meet a diversity of needs will be critical to success in 1997. Among those will be high LTV products and products for multi-family and small commercial properties. Cooper cautions that lenders may adjust their product mixes as rising delinquencies cause them to tighten credit guidelines in the C minus and D credit areas.

A Problem on the Horizon

Cooper tempers his optimism for the sub-prime lending market with a single caution: he forsees a substantial rise in delinquencies by late 1997 and 1998. "This will cause major sub-prime lenders to experience material jumps in problem assets and charge-offs," Cooper says. "This could lead to future problem in the asset-backed securitization market. There already are players preparing to make the most of this."

Cooper's enthusiasm for the industry is well-founded in his company's recent growth. Over the past two years, Fairbank Mortgage and its affiliate, Colony Mortgage, have grown from $45 million in annualized originations to over $200 million. The company began 35 years ago offering mortgages in Connecticut only. Today, Fairbank and Colony provide first and second mortgages and home equity loads in 11 states in the Northeast, South and Midwest. "To some extent, our success has mirrored the growth of the industry, but we expect 1997 to be a defining year for all of us in sub-prime lending. A year from now, expect to see a very different industry than the one you see today," Cooper concludes.