Several subprime mortgage lenders could face a stiff challenge as Countrywide Credit Industries Inc. embarks on a plan to cater to lowest- credit-quality homeowners.

The Calabasas, Calif., lender announced this month that it would offer loans to homeowners in bankruptcy.

Countrywide is a mortgage powerhouse with more than 400 branches nationwide. It would make the "D" loans on a wholesale basis and through its Full Spectrum retail subsidiary.

"The biggest impact is going to be on First Alliance Corp. because it is the biggest player in the D market," said Fox-Pitt, Kelton analyst Reilly Tierney, referring to an Irvine, Calif., lender.

Aames Financial Corp., Los Angeles, another big player in the D loan business, as well as some mom-and-pop finance companies, will also be affected, the analysts said.

First Alliance is a D-quality specialist, said chief executive officer Brian Chisick, but he questioned whether Countrywide's program would present a problem.

"Countrywide is mainly wholesale," he said. "They do loans through brokers; we don't compete with them in that sense."

Mr. Chisick said he is not worried about Countrywide's retail initiatives, either. "They don't have the knowledge that we have," he said.

First Alliance targets potential borrowers through direct mail and then presells loans by phone. "Will we do less business?" he asked. "No, we'll do more. We'll open more branches and do more direct mailings."

Although subprime lending has been a volatile industry in the past year, lending to lowest-credit-quality customers can still be very profitable, Mr. Tierney said.

"A low-loan-to-value, high-risk loan is one of the more profitable subprime areas," Mr. Tierney said. Borrowers traditionally pay a lot of up- front fees to get these loans, and this gives lenders a good earnings stream, he said.

Unlike other subprime lenders, D lenders do not need to rely heavily on gain-on-sale accounting because they reap so much profit up front, Mr. Tierney said.

Countrywide is a large player, he said, but no single mortgage lender has a dominant market share. The bigger risk to lenders like First Alliance would be if Fannie Mae were to join the D market, he added. u

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.