John D. Koch, executive vice president of Charter One Bank, Cleveland, knows how traditional lenders view the subprime market.
"Dumpster Diving in Mortgage Lending, or, Bankruptcy? No Problem!" was how he titled his presentation at a conference in Indian Wells, Calif., this week.
Mr. Koch is among a growing number of bankers focusing on building what is known as B and C business. Increased bankruptcies, strong demand on the part of investors for higher-yielding mortgage-backed securities, and changes in tax law have created an explosion in lending to people who previously wouldn't have qualified for a loan from a thrift like Charter One.
"We think there is fertile ground in a bank's portfolio for B and C opportunities," Mr. Koch said. "We're in a period where business models will change rapidly."
Mr. Koch was one of several hundred bankers and thrift executives in attendance at the conference, sponsored by the American Bankers Association and the Community Bankers of America.
B and C lending is one of seven areas in which Charter One is active, Mr. Koch said, noting the thrift's other residential lending program, as well as initiatives in consumer loans, commercial mortgages, indirect automobile loans, corporate loans, and leasing.
Generally, he said, the bank is on a quest for "energized assets"-loans that are higher-rated or with shorter durations. "One needs to be adaptive and flexible and try creative approaches to improve earnings."
Charter One began to study the B and C market in the second quarter of 1996 and made its first such loan last March, he said. "A lot of people today in mortgage banking and savings banks are taking a somewhat different approach," by merging A applications with other risk tiers, he said. Rather than buy its way into the business by acquiring a specialist, Charter One last January created a separate corporation, Equity One, staffed by consumer finance professionals.
"I wanted to monitor the risk," he said. "De novo affords us the luxury of creating our own credit culture and our own standards."
Equity One's loans outstanding totaled $127.4 million in 1997. It aims to build that portfolio to $310 million this year. Equity One will sell about $60 million of loans on a bulk basis in 1998, with about $15 million each quarter, as part of a pilot program. Equity One will not securitize these loans, Mr. Koch said.
Charter One also has a larger appraisal subsidiary to do collateral assessment of loans.
"We think you need to be especially careful of the collateral assessment process in B and C lending," Mr. Koch said. Having their own operation provides Charter One with quality control and comfort in collateral loans, he added.
"We're very encouraged by the early indications of our first sale. "It looks like there is significant investor demand for these loans," Mr. Koch said.
Charter One also is exploring cross-selling opportunities. The bank is engaged in a data-mining marketing effort to selected customers who might be appropriate for a direct-mail campaign, Mr. Koch said. B and C products are going to be cross-marketed to homeowners in Charter One's checking account and indirect automobile customer bases.
