Wall Street Watch: Credibility of Lenders Key in Securitizations

Wall Street wants a lot more than loans from mortgage lenders. "Volume for the sake of volume" isn't what it's about, said Daniel L. Perl, chief executive of Life Financial Corp., a Riverside, Calif., lender that regularly sells loans through investment banks.

With securitizations of $100 million or more very common, investment bankers want assurances they won't be burned by the mortgages they purchase. Wall Street "wants to rely on the integrity of the people who originate the products," Mr. Perl said. "Everyone wants the investors to get the returns they expected."

A positive outcome requires a lot of effort from lenders, he said. "A key issue is how well you underwrite loans. You've got to have consistent standards and a reputation for quality" because investment banks do not re- underwrite each loan.

Lenders can build credibility on Wall Street by investing in the securities that are created from their mortgages. "You can't just sell," Mr. Perl said.

Lenders that retain servicing are generally well received, because they have a direct stake in the way the loans perform.

"You have to be willing to support the paper," Mr. Perl said. "You want all your deals to go very, very smoothly. Ideally, the investment bank, the attorneys, and ourselves, as seller and servicer, are all on the same page."

As an example of a successful teaming, Mr. Perl and underwriters at Bear, Stearns & Co. pointed to a recent $123 million securitization by Life Financial, through its Life Savings Bank subsidiary.

The deal put 4,000 mortgage loans into a seven-tranche issue of securities with interest rates from 6.71% to 7.98% and maturity dates from 2008 to 2023.

As a safeguard, Life Financial said all the loans were underwritten to virtually the same standards, whether through retail, correspondent, or wholesale channels. Life Financial also avoided too heavy a geographic concentration by including loans from 40 states.

Credit ratings agencies also play a role in helping investors gauge riskiness. Life Financial's securities were rated from AAA through BBB by Fitch Investors Service and Aaa through Baa3 by Moody's Investor Service.

Purchasing debt through a real estate investment trust may be the price- sensitive investor's best bet if he or she is interested in adjustable mortgages.

To counter "volatility and historically high price earnings rations," UBS Securities analyst Gareth Plank recommends Thornburg Mortgage Asset Corp.

As a REIT, Thornburg can pass earnings to shareholders on a pretax basis. Also, the Santa Fe, N.M., company boasts solid operations, Mr. Plank said. "With low overhead and leverage, Thornburg provides an attractive yield and potential price appreciation."

Like other money managers that invest in mortgage securities, Thornburg profits from the spread between its investment costs and the yield of its portfolio.

Thornburg has a good track record. Investors in the company's initial public offering in June 1995 received an 18.7% return by mid-August. Over the same period, Thornburg's earnings per share and dividends grew at a compounded rate of 8%.

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