Some subprime lenders are securing buyers for their loans before they make them, a strategy geared to a turbulent securities market.
This month, Long Beach Financial Corp., Orange, Calif., said a "major Wall Street firm" had committed itself to buying $1 billion in loans, ensuring it a market for its production through the first quarter of 1999.
And last week, a New York investment bank committed itself to buying $280 million in subprime loans from BNC Mortgage Corp., the lender said.
The Irvine, Calif., company makes nonconforming loans through brokers and sells them for cash. The unnamed investment bank has previously bought $740 million in loans from BNC.
Though companies generally get less for loans when they secure up-front financing, as BNC and Long Beach have done, analysts said the strategy makes sense in today's market.
Investors are shying from securities backed by both mortgages and nontraditional home loans, and profitability has declined.
Getting a buyer to commit itself to buy loans before they are originated is a smart move, said Jeff Evanson, an analyst at Piper Jaffray, Minneapolis.
"They're trading price for promise, but promise right now is looking like the winning bet."
BNC entered into the agreement in an "effort to lock in cash premiums on mortgage loan sales through the end of calendar year 1998," said Kelly W. Monahan, president of BNC.
Subprime lenders who rely on securitizations have been forced to restate their earnings when loans prepaid faster than expected, and their stock prices have steadily dwindled this year.
BNC and Long Beach Mortgage rely on loan sales for funding and therefore rarely need to adjust earnings.
Nonetheless, investors have been tough on both companies. BNC stock was at $7.25 early Friday, down from its 52-week high of $14.125 a share April 22.
Long Beach shares were trading early Friday at $8.125, up 12.5 cents on the day but down from their 52-week high of $15.25 on April 21.
