With Production Down, Lenders Are Looking For Ways to Fill the Void. Resource Thinks it May Have the Ticket. Rates are up, production down and lenders are laying off employees. But lenders would prefer to use those bodies to help pump up volume. An innovative option more and more lenders are considering to keep those employees working is the niche market of B and C loans. Some companies have thrown themselves into that market, and one suchcompany is Resource Mortgage Capital. Weve always been more of a niche player in the mortgage business, said Sylvia Gillan, vice president of investor relations at Resource, a Columbia, Md.-based publicly owned real estate investment trust. The company, like most REITs, specializes in purchasing and securitizing residential loans, and investing in mortgage-backed securities. But it also provides mortgage warehouse lines of credit, and has expanded into more innovative programs. We knew refis wouldnt last forever, she said, So we looked at products that would generate additional funding volume. And for Resource, which had a seasoned staff with experience underwriting B-quality loans in its wholesale taxable subsidiary, B loans seemed like a good risk. You handle B loans much differently than vanilla A loans, she said, trying not to sound anti-consumer. But B loans are handled differently than their A-level counterparts, and Resource believed that to be able manage the added credit risk, it would have to control the product from beginning to endthe underwriting, originating, and servicing processes. To meet that goal, Gillan said the company plans to either create a loan servicing branch, or purchase one in the next two months. We rolled out our B program in 1993, but initially there hasnt been much volume, she said. But lack of interest wasnt because its customers were oblivious to B products, they simply had their hands full with refis. It was a timing thing, she said. So far, weve only done a couple million with [the B program]. But volume and expectationsfor both Resource and its investorsare likely to grow as the year progresses. Lender production levels have dropped substantially nationwide, and the volume- hungry brokers that make up the bulk of those contributing to Resource are expected to gradually begin increasing B paper production to fill the void. Keeping investor interest high may depend on the attractiveness of the program. TPMC, which is the taxable subsidiary that operates Resources B paper program, offers a variety of products, including programs providing up to $650,000 to borrowers for primary residences with loan-to-value ratios of 80%. Offering those jumbo loans to wealthy poor-credit risks may add volume quickly, but the market for that niche is limited. TPMC, however, also has a variety of other B and C products including fixed-rate and six-month Libor adjustable-rate products. Those offerings, which are divided into four grades or steps, provide between $50,000 and $400,000 with maximum LTVs ranging from 80% to 65%. Borrowers that have been 30 days late twice, three, even four times on their credit records are eligible, if they are current when they apply. The variety of products is large and rivals some of the products offered by some of the largest B and C lenders in the country, including industry giants such as Advanta Mortgage of San Diego. TPMC even offers a foreign national program designed for non-citizens without green cards. And that type of aggressiveness has some Wall Street analysts viewing Resource as a highly rated growth company. In January 1993, when Resource began mulling its B program, Lehman Brothers rated the REIT as outperform. Kidder Peabody rated the company as a strong buy in March, and Stephens Inc.which owns stock in Resourcerated it as buy for income. Gillan said initial production levels will be slow because getting borrowers through the lending process can take 60 to 90 days. And the program, which is barely 150 days old, will take time to develop beyond the Maryland-Virginia region where it operates before any real growth is visible. She said Resource wants to expand into 20 states by 1995. We tend to be more conservative about volume projections, she said, adding that meeting its target profit margins is the first priority. But there are still some expectations. Wed like to do $100 million [in B loans] and complete one securitization by the end of year, she said.

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