In a move that threatens to disrupt a long-standing alliance between mortgage companies and Wall Street investment firms, some big lenders are preparing to distribute more of their own mortgage securities to investors.
Such giants as Countrywide Credit Industries and Norwest Mortgage are moving ahead, lured by the prospect of greater efficiency and profits.
"There is a love-hate relationship between us and the Street. But we've made a very, very concerted effort to get into this," said James W. Richens, a regional director of mortgage securities sales at Countrywide Securities Corp.
Over the past year, the company has expanded in-house mortgage sales operations to 14 brokers from two and expects to do about 20% of distribution through the group, Mr. Richens said.
Norwest took its first step in May, when it held for distribution the subordinated part of a securitization.
The mortgage companies "see a better ability to protect their margins" by doing more themselves, said Edward Furash, chairman of Furash & Co., a Washington, D.C., bank consulting firm. "You don't want to restrict yourself by relying on third parties."
But the activity cuts into the role of private companies that have traditionally handled mortgage securitizations and the securities brokers who have always overseen sales. And Wall Street will not accept the development quietly, observers say.
"They will scream bloody murder," said Charles Ramsey, chief executive officer of Mortgage Risk Assessment Corp., Dallas. "They want to sell all the paper they can to earn the commissions they traditionally have."
Indeed, a trader at a leading mortgage securities firm called the development "very unfortunate and ill-timed." The trader, who declined to be identified, said lenders face an uphill battle as distributors because they lack the network that Wall Street sales forces do.
Still, lenders see the chance for profits as a major motivator. The kind of operation Countrywide is building would bring the company as much as $30 million a year that had been going to Wall Street firms, Mr. Ramsey said.
Since the creation of the mortgage securities market in the early 1980s, Wall Street has been the axis for all activities and the undisputed facilitator of sales and trading.
Conventional loans made their way to Wall Street through Fannie Mae and Freddie Mac, while such private companies as Residential Funding Corp. packaged jumbo and subprime loans.
The system spawned a $1.7 trillion mortgage securities market that allows lenders to replenish capital readily through loan sales.
Lenders who are now eying more of Wall Street's activities see the most potential in subprime sales because these products offer sizable spreads. But lenders acknowledge they are walking a fine line.
"The Street is very important to us," said Dale Ledbetter, executive vice president of Countrywide Securities. Indeed, despite the step-up in distribution, Countrywide, like other lenders, still relies on Wall Street to help underwrite deals-and values its alliance.
Mr. Ledbetter said the company's own sales force is, in part, a way to facilitate sales to banks that require special structures or smaller trades that Wall Street may not easily handle.
Norwest describes its approach as tentative, saying its efforts are currently modest. "We are beginning a direct program," said David Bialzak, vice president of structured finance.
"We're talking to the Street about this," Mr. Bialzak said. "We don't want to jeopardize relationships just because we want to take a bit more spread out."
Countrywide also acknowledges that it will have to continue to tread carefully. "I sometimes ask myself how long before the Street says, 'No more, we're not going to let you be a wholesaler to our clients,'" Mr. Richens said.
