For those who questioned whether the outlook for subprime lenders would ever improve, last weeks chorus of complaints about mounting regulatory burdens should erase any doubt.
A wrenching two-year period of consolidation that began in late 1998 was marked by defensive protestations from managements across the sector, each asserting that its companys business model was best suited to survive the shakeout. Of course, many companies did not survive the downdraft; the lucky ones found buyers and others simply closed up shop. (In cases like Money Store, both occurred.)
Now, the protestations have taken on a different tone, focusing on the stresses of a regulatory squeeze pressed on one hand to increase community reinvestment and, on the other hand, constrained in their ability to adequately price higher-risk loans.
The arguments make it clear that at least on a fundamental economic level interest rates are again on the way down, for one thing subprime mortgage lenders may be on the brink of a new upswing.
As a result, the land grab in the niche seems to have picked up steam. Citigroup Inc. was convinced enough on the outlook that it was willing to spend $30 billion-plus to bring Associates First Capital Corp. into its assemblage of mass retail financial service lines.
Meanwhile, J.P. Morgan Chase & Co.s first billion-dollar acquisition after closing its own merger would be to pick up not some investment advisory boutique in tune with CEO William Harrisons mantra for the Chase-Morgan marriage: This is all about wholesale but Advanta Corp.s mortgage business, an operation focused on subprime lending.
The logic was simple, said Luke Hayden, the Morgan-Chase executive vice president who heads up Chase Mortgage.
The rationale behind the deal is really to increase our capital commitment to intermediating mortgage risk, Mr. Hayden said. Were focusing on underserved markets because in underserved markets the spreads tend to be wider.
A willingness to take on both the servicing and the origination business was a key reason Morgan-Chase won out in the Advanta sale. Some 20 companies out of 48 contacted by Advanta adviser Salomon Smith Barney expressed interest in bidding, but most dropped out because Advanta insisted on selling both businesses in one package. Chase also knew the Advanta servicing business fairly well it had outsourced its subprime servicing to Advanta and got that business back in the deal.
Chase Mortgage, the nations biggest mortgage originator, has been in the subprime origination business since 1995. With the Advanta deal, it increases its output potential by more than one-third, adding a $1 billion annual origination capability to an existing $2.8 billion one. That is still a small slice of the $34 billion of originations the company produced through the first half of 2000, but the opportunities are sure to extend beyond the lending business.
Chase gains a terrific sales and marketing team in the deal, one that is represented in areas where Chase does not have significant penetration, Mr. Hayden said. Chase will extend jobs to most of the roughly 1,800 employees involved in the deal, he said.
The company will also gain the opportunity to provide additional financial services to customers. The deal included a $15.8 billion mortgage loan servicing and subservicing portfolio with more than 200,000 customers. Chase may well find opportunities to tap both customer bases in a way that Advanta, which has turned its attention to credit cards for small-business customers, no longer had the will or wherewithal to do.
To be sure, the customers are not your typical J.P. Morgan customers. But then again, the company continues to draw a substantial portion of its revenues and profits from its consumer businesses, which continue to operate under the Chase name.
The consumer business is here, Mr. Hayden said. Its a meaningful contributor to the bottom line.
And, yes, regulation is always a potentially explosive issue in businesses like this. But it is a risk, he said, that Chase is willing to manage.
We always pay close attention on the regulatory front for emerging issues, he said. But we have longstanding, detailed fair-lending policies. And we think the principles we use are appropriate.