Earlier this year subprime lenders faced a slew of business and political challenges.
In January, evidence of growing competition from Fannie Mae and Freddie Mac rippled through the market. Credit quality, an important factor given the industrys risky loan base, looked vulnerable as the economy slowed.
The rising controversy over predatory lending put many lenders on the defensive. And with prepayment penalties on many subprime loans, some executives expected little benefit from the refinancing boom.
But in recent interviews, executives with several subprime lenders were upbeat about the first quarter and optimistic about the rest of the year.
In fact, the refinancing boom did spill over into subprime, several said.
Eric Spence, the executive vice president for production at Washington Mutual Home Loans, said refinancing has had an important impact on its subprime business.
As volume increased in the Seattle thrift companys prime-lending channel, its subprime unit got the borrowers who did not qualify for traditional forms of financing, he said.
We think that will continue, said Mr. Spence, whose duties include oversight of Wamus wholesale subprime business, Long Beach Mortgage.
Wamus subprime unit lent 42% more to borrowers in the first quarter than a year earlier, Mr. Spence said.
Charles Coudriet, the chairman of Saxon Mortgage in Glen Allen, Va., said falling interest rates have helped his subprime business. So has a bigger consumer appetite for home equity loans, which he predicts will continue through the year.
Consumers are cleaning up their family finances, Mr. Coudriet said. The principal way to do that is with a home equity loan. We think its going to be a great year for lenders and borrowers.
Sam Cooper, the executive vice president of Chase Manhattan Mortgage Corp. and the head of its subprime unit, said Chase got off to a slow start in January but April brought record volume.
(The J.P. Morgan Chase & Co. mortgage subsidiary bought Advanta Corp.s subprime mortgage unit in January for $1.6 billion.)
Mr. Coudriet, one of the subprime lenders who have publicly decried the recent expansion by Fannie and Freddie into the subprime market, said that though they have put pressure on margins, they are not at this point totally monopolizing the business.
In fact, Eric Scholtz, executive vice president of capital markets at the Minneapolis.-based GMAC Residential Funding Corp., said the GSEs are not getting all of the loans because other investors are still paying higher prices.
Instead of passing along the savings from their automated underwriting systems, its the exact opposite, Mr. Scholtz said. Freddie and Fannie are driving a flat or worse price than the marketplace is already paying, he said.
Nor does the wobbly economy seem to be worrying many lenders.
Despite its other troubles, the housing market and the employment environment remain strong, Mr. Scholtz said. What is more, he said, even if housing prices decline, jobs are a more important predictor of losses.
Meanwhile, he said, borrowers can still pay.
Mr. Cooper said Chases servicing operation picks up credit problems very quickly, so managing credit losses should not be a problem.
One of the reasons we bought Advanta was to have control of servicing subprime loans, he said. One of the things we believe in is working with customers very quickly in terms of remediating any problems they have with their loan.
But charges of predatory lending remain a burr under the saddle.
Many subprime lenders say that one response a growing number of local and state laws restricting high-cost loans may threaten their business. (Last year the subprime unit of Calabasas, Calif.-based Countrywide Credit Industries stopped making loans in North Carolina, citing a predatory lending law there.)
Efforts continue to convince regulators and the public that subprime does not mean predator indeed, that subprime lenders are the good guys.
A spokeswoman for Conseco Finance of St. Paul said predatory lending has definitely cast a pall on the industry.
Conseco is meeting with regulators in various states to make sure that they know what were about as a company, how we treat customers, and the practices we adhere to, she said.
Mr. Cooper of Chase said it has never done most of the things that various groups have labeled predatory, such as selling single-premium credit life insurance.
Some subprime lenders say they are paying the price for others lack of scruples.
Mr. Cooper said nonbank lenders should be subject to regulatory scrutiny, as banks are. A lot of independents and other players have the ability to stay below the radar screen, he said. Why not put everybody through the examination and scrutiny that we go through?