Subprime loans offer mortgage bankers a profitable way to expand their offerings selectively, industry experts said at a conference last week.
"Lending is getting more specialized," said David Olson, president of David Olson Research Co., Columbia, Md. "It's difficult to try to be all things to all people."
Mr. Olson - speaking at a secondary-market conference sponsored by America's Community Bankers - said subprime, or "B" and "C," loans are a good specialty product because they fill a key niche.
B and C loans accounted for $125 billion of the $750 billion of mortgages originated in 1994, according to industry statistics.
The volume of subprime loans will likely grow this year, according to Sidney A. Miller, chairman of Delta Funding Corp., Woodbury, N.Y.
B and C lending "is a must to hold customers," Mr. Miller said. "You don't want them going down the street and being taken over by someone else."
Mortgage bankers, Mr. Miller said, recognize that subprime loans produce greater profits through higher points and rates. The loans also fulfill Community Reinvestment Act requirements, he said.
The risks of offering these products are not as great as bankers might think, Mr. Miller indicated. Nearly 40% of B and C loans fall just below the standards of Fannie Mae and Freddie Mac, he said.
Right now, 85% of B and C loans are made on homes in California and on the East Coast.
The typical subprime loan requires less documentation because it has a lower loan-to-value ratio than a conventional loan, Mr. Miller said.
The approach to subprime lending, he said, differs from conventional lending in a number of ways, and that's why mortgage banks should set up separate operations to handle B and C loans.
"The typical underwriter wouldn't approve them," Mr. Miller said. "Our advice is to get someone experienced with these products."
Once bankers get a taste of diversification, they should also selectively try other products, like jumbo loans. "You have to move more quickly and offer more things," he said.
Mr. Miller described loans with high loan-to-value ratios as a niche bankers could explore, but he also cautioned: "This is very risky, very heady stuff. It's possible though. A lot of thrifts like to specialize in this."
Mr. Olson mentioned FHA and VA lending as a direction that bankers might want to take as a ground-breaking move. "Traditionally, thrifts have stayed out of this, but that era is gone," he said.
