but in the last few years large financial institutions have found such sales to hold economic benefit. In fact, the opportunities to achieve the strong prices associated with mortgage-backed securities have never been greater. Bidders for mortgage assets regularly pay premiums that range from 4% to 11% above par, and without the costs and structure of a securities issue. Yet one of the key drawbacks is that virtually all whole loans are sold with the servicing rights included. Hence, the sellers do not receive potentially substantial income from servicing. Unlike sales of mortgage-backed securities, whole-loan sales can be settled at amounts of $250,000 or more. Mortgage-backed securities issues are really not cost-effective until they reach at least $50 million, and superior results are not available until the $100 million threshhold is crossed. Here, the smaller lender can compete with and even outdo established household names. A good example is the ability to offer greater loan-to- value to those with weaker credit. Having said all of this, I must add that the whole-loan sector is not quite so simple. There are pitfalls. Coastal Mortgage has fewer than 10 investors and sells mostly to just four. Because of lack of volume and back-office constraints, one can only serve a few masters because of differences in lending patterns and pricing. An investor rate sheet is probably one of the decade's great lies. Rates alone do little to ease the flow of product settlements. In fact, rates give one a false sense of security when selling a loan to a client. Many times, the initial credit grading of a particular loan may not turn out to mirror that of the first review. Yet before any production of loans with whole-loan sales in mind, the contract or purchase and sales agreement must be executed. This document is the most important part of the investor relationship. Pitfalls here include provisions that mandate repurchase stipulations, premium recapture, and various forms of hidden recourse. I advise any whole-loan seller to consider carefully any agreement that requires guarantees involving appraisal accuracy, first payment default, premature premium recapture, and warranties regarding environmental issues. No agreement should require repurchase due to borrower default or late payments. This arrangement is basically a repo and not a FASB-77 sale. The same is true for warehouse lending deals that require repurchase after a certain amount time has elapsed. One might find oneself with economic collapse due to an inability to fund daily operations. Bailee letters, final approval of underwriting conditions, and title and closing instructions can be very awkward if one does not understand exactly what is expected by the creditor, custodian, and investor. Investors expect lenders to present a well-organized, agency-style settlement package. Yet behind all this, lender management must exercise great care to review appraisals, income verification, and credit grades. The reason here is both a blessing and a curse. Unlike the case with Fannie Mae and Freddie Mac, there is no standardization, so one company's B rating maybe another company's C, as reflected in the allowed loan-to- value, debt ratio, and price. Foremost here is that the lender's management must fully understand what each investor will accept and be able to bargain for a fair price. One should not be afraid to seek bids from several players on the same grouping or pool of whole loans since pricing is very competitive. Before agreeing to a transaction, know who your investor is, get references. Do not think that a due diligence team has the authority to modify an agreement. Generally, only those authorized by corporate resolutions can speak for the investor. Do not accept oral quotes unless they are not followed up in writing, and supervise any member of the investor's company who is on your turf. Getting to know the investors and how they view your abilities is important. Mr. Hardester is marketing director for Coastal Mortgage, Baltimore.

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