Cheap Pricing on Loans To Riskier Borrowers Seen Harming Industry

Several newer originators of home loans to borrowers with marred credit histories are being accused by veteran lenders of pricing too aggressively.

They complain that the pricing practices are potentially destructive to the industry.

"It is really difficult for some people to understand that they are really overly aggressive on price and not pricing for risk," said a chief executive at a noted B-to-D lender based in Florida.

Since the home loan refinancing boom ended last year, scores of mortgage banks that had primarily originated agency-quality first mortgages have flooded the B-to-D loan market. And their inexperience is showing, say veteran lenders.

Capstead Inc., Dallas, is said to be one lender with a hard-nosed pricing strategy in this market. A rival executive said Capstead's prices for B and C loans were better than his A rates. Some lenders have also singled out CWM Holdings, Pasadena, Calif. CWM, the former Countrywide conduit, is now an independent company that is managed by Countrywide for a fee. Countrywide owns about 3% of CWM.

"I can understand CWM's desire to get into" home equity lending, said a Los Angeles-based chief executive officer of a B-to-D lender. "But I would suggest to you that a little bit of caution is advised."

He said the mind-set of companies like CWM must be changed in order to make B-to-D loans effectively.

"There is much to be learned from those that are in the business already," he said, citing the ability to price for risk as one vital skill.

CWM "has done a lot of deals that they historically wouldn't touch," said another chief executive, whose company is based in Washington State. "If A lenders or banks get into this business and decide that everyone in the world deserves an A (interest) rate, that would have a huge impact on our industry."

Michael W. Perry, CWM's chief operating officer, laughed off the criticism. He said CWM has not been buying loans long enough for market observers to criticize its actions.

"If I had loan volume, I would agree with them," he said. "I have one loan."

He said CWM's pricing is in the "middle of the pack if anything."

CWM now offers a six-month loan based on the Libor index and a three- month adjustable. For each product, CWM offers four levels of pricing, A- minus through D.

Mr. Perry said CWM is only now starting to track the pricing of other wholesalers. But he said CWM is having problems finding the right price like other new entrants.

"It will be a while before we figure out if we are right on the mark," he said. "It is one of those markets that is not very precise and is a lot more like sticking your finger in the air" to find the right pricing.

He said CWM would iron out its pricing after it is rated by the credit agencies for its first securitization - expected in the third quarter.

"We are just getting our feet wet, and we will firm up our pricing as we go," he said.

CWM formed the unit to buy B-to-D loans in February when it hired Gregory Bowcott, a former senior vice president of Advanta Mortgage Corp.

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