In an unmarked office building opposite its headquarters here, Countrywide Credit Industries is quietly mapping new strategies for one of the hottest areas of consumer lending.
Last August, the nation's largest independent mortgage lender created a division to make loans to people with less-than-pristine credit records. It also brought in a veteran of subprime lending, Paul Abbamonto, from Long Beach Mortgage, another California company that specializes in the niche.
By yearend, Countrywide had funded a solid $220 million in loans. This year, it is on track to originate $800 million of so-called B and C mortgages, company officials said.
Although Countrywide's subprime mortgage volume lags that of industry leaders such as Money Store Inc. and United Companies Financial, it is quickly gaining ground. The top 10 lenders in the field originate an average of $74 million a month, estimates consultant David Olson of Columbia, Md. Countrywide, though a newcomer, has funded between $60 million and $70 million a month this year.
Countrywide executives say that although they are determined to gain a greater share of the market, they are more concerned right now with structuring the new venture correctly.
To make its entrance as smooth as possible, Countrywide has wooed top lenders from leading B and C shops and is selectively marketing the loans through its network of wholesale offices.
"We don't have specific goals, so it is more important that we focus on quality rather than quantity," said Angelo R. Mozilo, chairman and chief executive of Countrywide Home Loans, the company's principal lending unit. "We will see how we do over next year to 18 months, and then we'll set numerical goals for it."
Declining loan volume has feuled mortgage lenders' competition. To restore volume and healthy margins, many companies have explored the subprime market, previously dominated by a few specialists.
Countrywide's drive is notable because it has consistently led the industry in developing new products, new technology, and new approaches to management.
A behemoth such as Countrywide can instill fear in its competition, but B and C lenders say they have yet to feel the giant breathing down their necks.
Jim Barto, director of sales for the western region at Household Financial, said Countrywide will probably become a large presence, but has not bumped into the lender in the B and C world.
"Everyone has their niche, and depending on what part of the market Countrywide decides to go after, we'll see what it means for me," said Mr. Barto, who buys loans from mortgage bankers, including Countrywide.
The president of a top 10 B and C lender, who asked that his name not be used while commenting about a competitor, said there is already a large amount of competition, and he does not expect to feel the presence of yet another lender, even one as large as Countrywide.
"Countrywide certainly has the power to buy their way in," he said. "On some level, they may even lend credibility to the business, and that wouldn't be bad either." But, he said, he has seen many large A lenders come and go from the B and C business in the last three years. "If they can't conform to it, they leave it," he said.
Consultant John Dewey said, "Margins will come down as B and C lenders are forced to be competitive with A players used to dealing with slim margins." Mr. Dewey is a principal of Dewey Consulting Group in Newport Beach, Calif.
Heated competition will force B and C lenders to become as efficient and technologically sophisticated as Countrywide and other conventional lenders, Mr. Dewey said.
"B and C lending no longer has the ugly, redheaded stepchild stigma it did few years ago," Mr. Dewey said. "It's now in vogue."
For now, Countrywide originates the loans through its 65 wholesale offices in 40 states. Mr. Abbamonto, senior vice president for B and C lending, said the unit would expand slowly, to ensure that the growth is manageable. He said Countrwide is exploring ways to originate the loans through retail channels.
The maturing of the B and C loan secondary market over the last four years prompted the largest lender of traditional loans to move into this new line of business, Mr. Mozilo said.
Though observers are likely to judge Countrywide's commitment to B and C lending by its origination volume, Mr. Mozilo said his immediate concern is loan quality.
"We don't try to make A underwriters into B underwriters," he said. "The B unit is all B people."
The B and C division is separate from the company's other lending operations.
Traditional A lenders often fail when they try to handle B loan products as they do A loans, Mr. Abbamonto said. The operations are centralized to take advantage of the potential economies of scale that allow a lender to work on more loans, without adding to the staff or resources.
Almost all of the 120 employees in the division have B and C lending experience.
Mr. Abbamonto said: "Countrywide looked at successful operations and hired people with experience. They know what works and what doesn't work."
The staff is split between internal people who underwrite and handle the loans, and those who go out to talk to the brokers who will offer the loans to their customers, Mr. Abbamonto said.
When it was his turn to hire people to staff the unit, the Countrywide name helped, Mr. Abbamonto said.
Stock analysts say Countrywide should be in the B and C business because it will help them diversify, reach more borrowers, and take advantage of one of the few mortgage products that can be originated profitably.
Countrywide "should definitely be in it," said Thomas O'Donnell, an analyst at Smith Barney. "A lot of companies are going there, and smart companies like Countrywide will do it well." Despite the gold-rush mentality of A lenders getting into the business, it is still largely underserved, Mr. O'Donnell said.