Residential Funding Corp., General Motors' nonconforming home loan subsidiary, said this week that it has emerged unharmed from the credit crunch that plagued the subprime business, and that it is preparing to increase its participation in that market.
The Minneapolis-based unit of General Motors Acceptance Corp., GM's finance company, is prepared to expand subprime securitization volume by nearly 60% this year, said RFC chief executive Bruce Paradis. "We're really been positioning ourselves for growth," he said.
The company, which partners with originators and buys loans from them, securitized about $30 billion in nonagency mortgage loans last year, including about $3.5 billion in subprime loans, or loans to borrowers with damaged credit. RFC plans to securitize $5 billion to $6 billion in subprime loans this year, Mr. Paradis said.
He said RFC was not hurt by the subprime industry's liquidity problems last year, in part because the company has been conservative about the price it will pay for loans, and in its accounting.
"We saw the market as pretty rich, from a pricing standpoint, and stayed on the sidelines," Mr. Paradis said.
"We've tended to be more conservative in our approach to the business in general, and that has cost us market share in the past," Mr. Paradis said, "but we've tended to avoid some of the pitfalls."
Much of the capital crunch that hit companies late in 1998 can be attributed to lenders borrowing on margin, or borrowing against the value of loans they had securitized, Mr. Paradis said. When competition increased and these loans prepaid faster than expected, companies were forced to restate the value of their assets, and often pay back their loans.
RFC entered the subprime business in 1994 with the purchase of a New Jersey-based lender. Now the unit is working on strengthening its ties with the strongest organizations that make subprime loans, Mr. Paradis said.
RFC already has ties with several commercial banks that it buys loans from, Mr. Paradis said. "A good share of product comes from mortgage originators that have not specified in subprime lending."
RFC has built automated underwriting systems that will enable lenders to originate subprime product, Mr. Paradis said.
Freddie Mac has been edging into the subprime business with its own automated underwriting system that allows lenders to make loans to borrowers with credit records that disqualify them from traditional agency mortgages. But Mr. Paradis said the GSE is not yet a serious competitor to RFC.
RFC's servicing department is also helping the company get a leg up in the subprime industry, he said. The unit was named a "special servicer" by Standard & Poor's and Fitch Investors Services on Monday for its proficiency at handling delinquent assets and reducing losses, RFC said.