Less than a week after Bank of America pulled out of subprime real estate lending, Countrywide Credit Industries is making its own statement about how it wants to approach the market: full steam ahead, on multiple fronts.
"We remain very committed to it. It's part of our core business" and "we are prepared to be more aggressive" in subprime lending, said Greg Lumsden, who was recently promoted to president and chief executive officer of Countrywide's retail subprime unit, Full Spectrum.
Countrywide's interest on the retail side has been evident for some time. The No. 7 subprime lender at the end of 2000 (the company ranks fourth among conventional lenders overall), it appears poised to make its biggest run at the category, including more attention to wholesale side, since it entered the market in 1995.
The company announced Monday that it had hired Debbie Rosen, a former executive at Associates First Capital Corp., to head up its wholesale subprime lending unit. The company said the move "significantly furthers" its commitment to "reaching the dominant position" in wholesale subprime lending.
"My personal commitment is to grow" subprime lending "through expanding the sales force and product offerings, providing homeownership solutions that meet the widest range of borrowers," Ms. Rosen said in an interview Tuesday.
In addition to hiring Ms. Rosen, the Calabasas, Calif., lender is augmenting its sales force in both the retail and wholesale divisions, and it has formed a new wholesale management team - headed by Ms. Rosen - to increase loan purchases from mortgage brokers and other originators.
Mr. Lumsden said Full Spectrum is adding hundreds of salespeople in its 42 field offices and four central offices, while Mr. Rosen plans to double her 124-person sales force in the field.
Doing more wholesale lending may be a risky proposition given the wave of litigation striking at every part of the lending chain. By purchasing loans from mortgage brokers and other originators, wholesale lenders do not have control over how the borrower is treated or in some cases the terms of the loan. And wholesalers are increasingly coming under fire for the loans they buy and in some cases are being taken to court to be held liable for those loans.
Ms. Rosen, however, said Countrywide maintains a "high-touch relationship" with its brokers to make sure they are licensed and trained.
Countrywide also runs the loans it buys through a proprietary automated underwriting system, she said, as well as through manual underwriters at its two underwriting shops in Plano, Tex., and Rosemeade, Calif.
She also said that brokers are essential to mortgage lending because they have "many points of contact with the customer that we think are vital."
Countrywide has moved slowly into the subprime market, the executives said. It began buying the loans wholesale in August 1995 and started originating from retail branches a year later.
"We have had the luxury of taking our time because we already had a sound" conventional lending enterprise, Mr. Lumsden said. "We took time to fully understand the subprime business."
Last year Countrywide originated or bought $5.2 billion in subprime loans; of that, $1.6 billion was retail, $1.7 billion wholesale, and $1.9 billion correspondent. It produced almost $61.7 billion of residential loans overall in 2000, making the subprime portion 8.4%.
Countrywide appears to be benefiting from consolidation in the subprime industry and other events that have caused many companies to go out of business in the last three years.
The Russian debt crisis in 1998, which dried up the bond market, hurt many small subprime lenders that depended on securitization as their source of funding. Some lenders took hits for making risky loans, while others were forced out by lawsuits over unscrupulous lending. The big players, such as Washington Mutual Inc., Chase Manhattan Mortgage Corp., and Citigroup Inc., have since picked up many of the survivors.
"The landscape has opened up," Mr. Lumsden said.
The handful of companies now controlling the market include Chase, which bought Advanta Corp. last year; Citigroup, which purchased Associates First Capital; and Household International Inc., one of the last standing independent subprime giants. Smaller players still alive include New Century Financial Corp. of Irvine, Calif.; Option One Mortgage, an H&R Block Inc. subsidiary in Irvine; Ameriquest; and First Franklin.
Though poor management has also been cited as the cause of some subprime lenders' demise, most notably Superior Bank of Hinsdale, Ill., Mr. Lumsden said, "We feel comfortable we know how to do it," Mr. Lumsden said.
To be sure, with the economy limping and scrutiny from regulators, politicians, and activists showing no sign of abating, now may not seem the best time to turn up the volume in subprime lending.
But if the risk is handled right, this lending can be very profitable. The loans are made to borrowers with blemished credit at higher rates, with the lenders trading the greater risk for greater reward. They and analysts say that charging higher premiums can minimize the threat of higher losses caused by a slowing economy.
Michael McMahon, an analyst with Sandler O'Neill & Partners in San Francisco, said that if it is executed judiciously, Countrywide's plan is "a smart move."
"The pendulum is currently swinging far to one side in response to some industry problems such that a number of people are getting out of the business, which may not be the right thing to do," he said.
Countrywide's origination machine is capable of lending $10 billion to $15 billion a month, but the company has kept volume in the subprime segment low, Mr. McMahon said. "They've gone slow, they've learned the product, they've been extremely conservative with their gain on sale assumptions, more so than anyone else in the industry."
In fact, Countrywide's subprime lending this year has been just slightly higher than last. In the first quarter it produced $1.3 billion of loans, ranking eighth overall; in the second quarter it produced $ 1.4 billion, ranking 10th.
Mr. Lumsden said despite all the talk about predatory lending, the subprime industry has made conditions better for all borrowers.
In the 1980s, he said, borrowers with a 580 Fair, Isaac score - 800 is the highest - would pay 8% to 9% of the loan amount in fees and a 16% interest rate.
"Today they are likely to pay 4% in fees and a 9% interest rate," he said. "Things have gotten better for the consumer."