Originators of subprime mortgages have a few pitfalls to watch for in 1997 after a record year in 1996, market observers say.

One of the clouds is delinquency rates. Most home equity companies have managed to keep the late payments low, but critics say record credit card delinquencies will eventually translate into higher numbers of late payments on home equity loans.

"Delinquency and bankruptcy are really big issues," said Christine Clifford of Wholesale Access, a Columbia, Md.-based consulting firm.

If chargeoffs increase, company stock prices will fall, and market leaders may get snapped up by banks and other finance companies, she said. "The sharks are going to start circling," Ms. Clifford said. "Right now, they are waiting on the sidelines to buy these companies."

Analysts at Natwest Securities, New York, say the two-to-three-year outlook for home equity lending is outstanding. But the investment bank is keeping a close watch on management teams. Many newly public companies are unseasoned, according to a recent Natwest Securities report, and management is not used to the rapid expansion they're experiencing.

Last year was a big one for the market's luminaries, when an originations increase of less than 100% was unusual.

RAC Financial Group Inc., Dallas, appears to be leading the pack. The company's new loan volume jumped more than 700% in its fiscal 1996, which ended Sept. 30.

RAC's controversial high loan-to-value product, which allows homeowners to borrow more than 100% of the value of their home, helped fueled the growth, analysts say.

Wall Street's demand for subprime and home equity loans to be packaged as securities helped fuel the originations boom in 1996. Securitization of these loans doubled, by most estimates, to more than $30 billion.

Companies that hold the loans in portfolio are in the minority, and the concept will become increasingly unpopular, said Len Blum, managing director for asset-backed securities for Prudential Securities, New York.

Securitization levels the playing field, Mr. Blum said, and helps mitigate risk. "Had a lot of thrifts securitized, they would still be in business," he said. According to Prudential estimates, home equity securitizations should reach more than $43 billion this year.

Smart subprime and home equity lenders will focus on marketing in 1997, Mr. Blum added, using television and 800 numbers to reach consumers. RAC credits a marketing campaign featuring television ads with Miami Dolphins quarterback Dan Marino for fueling its originations.

More banks will also be jumping into the subprime lending fray this year, the Natwest Securities report said.

"Pushing loans on consumers will remain a high priority (for banks) because there is nothing better to do. This will fuel additional growth in nonconforming mortgage lending," the report said.

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