LOS ANGELES - Gary Judis, chief executive of Aames Financial Corp., is a man who truly appreciates his own product.
"Money is the raw material of life; it's the commodity for all seasons," says Mr. Judis, 56, as he puffs on a long cigar. "Why should I get into the ashtray business?"
Certainly not when Aames is doing so well. The Los Angeles-based company has established itself as a leader in the burgeoning field of home equity loans for people with blemished credit histories. And it is growing rapidly.
Last year, Aames increased its loan production 70%, to $268 million. Nearly one-third of that came from a new division that buys loans from other lenders; the rest came from an expanding network of retail offices.
Aames, which went public in 1991, has fueled its recent growth by repeatedly selling new loans into the developing market for home equity securities. Aames has pulled off 12 securitizations in the past three years.
"They know what they are doing, and they do it well," said David Olson, a Columbia, Md., consultant.
Aames' stock in trade is exceptionally low-grade credit. While many lenders have begun pursuing loans rated "B" for quality, Aames focuses on the riskier "C" and "D" mortgages and home equity loans. By contrast, loans eligible for sale to Fannie Mae and Freddie Mac are rated "A."
At Aames, a C borrower is defined, in part, as one who has been past due on a mortgage payment for 30 days no more than 12 times and 60 to 90 days past due not more than once in the last year. The borrower must have maintained delinquency-free credit for the preceding two years on most of his consumer loans.
Aames protects itself from losses by demanding extremely low loan-to- value ratios. That means the average Aames homebuyer borrows against only 50% of the home's value, compared to about 80% for a traditional loan.
Mr. Judis - a short, tanned man with a wrestler's build - clearly enjoys serving this market.
"I am not in the business of taking loans away," he said. "When you help someone over a hump, you win a lot of compassion and loyalty."
And he is openly thrilled by the recent growth.
"It is an absolutely exciting time," he says. "This must be the most exciting time in my 30 years in business."
Aames has been helped lately by a broad surge in the home equity market that was prompted by the end of the first-mortgage refinancing boom of 1992 and 1993.
The refinancing boom left many borrowers with record-low interest rates on their mortgages. Should some of them need further cash - say, for a car or home improvements - it is unlikely they would refinance their home loans again, at higher rates. Instead, most are expected to choose a second mortgage, long a specialty at Aames.
"This is our time in the sun," he said.
Mr. Judis is aggressively positioning Aames' retail operation to take advantage of today's market conditions. The company now operates 24 branches in California and five outside the state. Within the next few months, offices will be opened in Seattle and Tacoma, Wash.
"Basically, now they see the whole nation ahead of them," said Selman Akyol, a research analyst at Pauli & Co., St. Louis.
Meanwhile, Aames has heavily stepped up its purchases of loans from other originators, or "wholesale" lending.
Aames is now able to buy loans - and a greater variety of them - in 24 states. And Mr. Judis plans to "deeply entrench" Aames in wholesale markets nationwide.
He has been hiring executives to act on that intention. In late March, he hired his second top executive in the past two months, James Kidwell, who heads up Aames' national underwriting facility. Mr. Kidwell had been at Advanta Mortgage Corp.
He joined another Advanta alumnus at Aames, Mark E. Costello, who was hired in February to lead the wholesale operation.
Mr. Judis said he would hire two more senior executives this spring.
In the past, companies like Aames were limited by the funds they could get from investors and other lenders. But in recent years, taking advantage of growth in the home equity securities market, Aames has been able to replenish its funds routinely by securitizing its new loans.
Nationwide issuance of home equity securities totaled $10 billion last year, up from $6.6 billion in 1993, according to Asset Sales Report, an American Banker newsletter.
As interest rates began rising more than a year ago, the first-mortgage- backed securities market began to crumble. Investors have instead turned in droves to the asset-backed securitization market, which includes home equity loans.
Aames' most recent securitization, at the end of March, was for about $90 million. That still pales in comparison to what is done by The Money Store Inc., Union, N.J. That company securitizes about $600 million of loans per quarter. But Aames is a newer participant in wholesale lending and is buying loans of a slightly different credit quality than The Money Store does.
Predictably, some observers are wondering privately whether Aames is growing too quickly for its own good. Over the years, scores of companies have surged to prominence in the mortgage industry - only to stumble on credit-quality or interest rate risk.
The stock market, however, appears to be a strong believer in Aames. Since Jan. 1, Aames' stock price has climbed 65%, to $13 a share late last week. And in the last six months of 1994, Aames' revenue soared to $25.1 million, a 45% increase from the same period in 1993.
"I am looking for some good things from Aames," said Jonathan P. Braatz, vice president at Fahnestock & Co., New York. He cited Aames' move beyond the confines of California and its relative immunity to interest rate changes as principal likely contributors to its growth. (People with impaired credit tend to borrow without much regard to rates.)
Perhaps the most immediate threat facing Aames is increased competition. Just about every mortgage lender in America has at least considered getting into the home equity market since the end of the refinancing boom. Countrywide Credit Industries and the GMAC Mortgage subsidiary of General Motors Corp. are among those expanding their home equity lending activity.
Commercial banks and other traditional lenders also are paying more and more attention to borrowers with impaired credit histories.
But Mr. Judis professes to be unfazed. He says he doesn't expect new entrants to threaten Aames for perhaps three years - a "window of opportunity in which we can enjoy unabated growth."
"You cannot buy your way into this business," he says. "You have to learn your way into this business."
