Two banks have been expanding their presence in subprime lending this week, adding steam to a recent industrywide push to reach previously ignored customers.
First Tennessee National Corp. said Wednesday that it would purchase the Kansas-based subprime lender McGuire Mortgage Corp. in a stock-for-stock deal. The purchase price was not disclosed, but analysts estimate First Tennessee will pay about $30 million for McGuire, which has 16 branches and originated $350 million in loans last year.
On Monday, Directors Acceptance, the subprime division of Wells Fargo's Norwest Mortgage unit, hired 112 former employees of Unicor, a division of United Companies Financial Corp., to work in its new underwriting center in Baton Rouge, La. On the same day, Directors opened an underwriting center in Grand Rapids, Mich., with a 15-employee staff it aims to expand to 50.
Banks have traditionally shunned the subprime business, saying lending to people with blemished credit records was too risky. But the higher margins that these loans command are attracting more and more lenders, and a recent downswing in the stock of subprime companies stock has made acquisitions cheap.
"Any lender wants to provide a full spectrum" of products, said Jerry Baker, president of First Tennessee Mortgage Cos. "No market is full of only prime borrowers."
First Tennessee's acquisition deal is part of an effort to diversify revenues and enhance an already strong fee-income business, said Salomon Smith Barney analyst Jacqueline S. Reeves. She noted that the company has been making mortgage acquisitions since 1990.
And it is not done yet. "We're absolutely looking" for more acquisitions, Mr. Baker said. First Tennessee is hoping to bulk up its presence in California, among other areas, he said.
Norwest's Directors Acceptance has been steadily growing since its inception three years ago. In 1998 it originated $900 million of loans, up from just $230 million the year before. This year it expects to more than double last year's volume.
The fast-growing subprime industry did some painful maturing last year. In 1997 the stock of subprime specialists skyrocketed, as did their origination volume. But last year many of them failed as increasing competition took its toll.
"The subprime market is evolving to our gain," said Judith Berry, president of Directors Acceptance. "We seeing now an opportunity to pick up talented sales and technical staff."
Norwest hired 28 account executives from Unicor in November to work in its wholesale lending division, who will focus on purchases of subprime loans. Last October, United Companies announced a major restructuring, including 1,000 layoffs.
Though Directors gets its name from a mortgage bank that Norwest acquired in 1995, the subprime operation was built from scratch in-house.
In 1996, when the unit started making loans, lending to consumers with blemished credit histories was a competitive field, crowded with aggressive lenders who put pressure on everyone else to compromise their standards, Ms. Berry said.
"We took a conservative approach to this business to begin with, hoping to get to a time like this, when prudent risk management and rational pricing would become the norm."
Veteran subprime lenders should have an easy time fitting into Norwest's stricter credit culture, Ms. Berry said. "The prudence we apply is acceptable to these salespeople today. It wouldn't have been six months ago."
Large, well-capitalized institutions will dominate the subprime business in years ahead, but overall originations will be lower because of banks' tighter credit standards, Ms. Berry said. "In the last couple of years volume was inflated by loans that shouldn't have been made."
Ms. Berry says there is "tremendous potential" to cross-sell other Wells Fargo products and services such as credit cards to Directors' borrowers.
"We like the margins" in subprime lending, she said, but the move also gives Directors a chance to get customers who are "great targets for other products."
Also unusual for the subprime world: Directors gets many of its leads from realtors and builders, a practice that is more common among prime lenders.
Directors' new Baton Rouge hires will feel at home: Norwest bought the same office space, furniture and all, previously used by Unicor. Aside from the two new offices, Directors has three other underwriting centers. Expanding capacity is necessary to accommodate the tremendous volume the unit is seeing, Ms. Berry said.
With the 28 account executives it picked up from Unicor, Norwest now has 51 full-time salespeople in its wholesale area who are focused on subprime.
The backing of a big bank gives Directors a cost advantage. Directors uses the same retail sales force as Norwest Mortgage, Ms. Berry said.
Cost-cutting is new to the subprime industry. Historically, most subprime lenders were willing to pay high premiums for new loans and to incur other high origination costs, because margins were so wide. But unexpected prepayments last year have depressed the market value of subprime loans, compressing margins.