Cary Thompson has proved to be more than an auctioneer at Aames Financial Corp.

Many thought the former Natwest Markets managing director, who came on board as chief operating officer in March 1996 and became chief executive six months ago, was brought in help sell the company. Indeed, Aames announced in August that it was shopping itself around. Since then, several suitors have reportedly paid a visit but passed on making an offer.

Analysts now credit Mr. Thompson, however, with engineering a complete turnaround. The ultimate goal may still be a sale, but analysts see a more attractive company on the auction block.

Aames is transforming itself from a mortgage lender that caters to the least creditworthy borrowers via brokers into a retail shop that targets homeowners with better credit quality.

"The things he's doing are the right things," said Gareth E. Plank of UBS Securities. "He's very aware of the industry's problems and is working to make sure that Aames" doesn't fall prey to them.

In May, the company announced a new emphasis on its retail business in conjunction with a painful writedown, needed because rising prepayments of its loans had wiped out anticipated profits.

Buying loans in bulk had become less lucrative for large lenders in the preceding 12 months as competition increased.

The acquisition of One Stop Mortgage last August brought Aames 25 new branches, and the company has since doubled that number. Retail originations are up more than 80% since the acquisition, Mr. Thompson told investors at a recent conference.

Aames will still do some correspondent and bulk business, Mr. Thompson said, though it will handle the loans in a different way.

Following the advice of "several of the large thrifts that looked at us," Aames is setting up a stand-alone real estate investment trust, or REIT, that will do its correspondent and bulk business, Mr. Thompson said.

"It will turn into a cash machine that generates true earnings," he said, unlike securitized loans, which rely on sometimes precarious gain-on- sale assumptions to calculate earnings.

An REIT structure lets a lender retain more profits, thanks to favorable tax and collateral requirements.

Aames has also shifted in the past year from lower credit grades, C and D borrowers, to B and even A-quality borrowers.

"It's a good strategy," said Jeff Larsen, chief executive of First Street Mortgage and a subprime industry veteran. D-quality loans carry high coupons, he noted, but have a "lot of the aggravation factor."

Because Aames is also moving the administration of its loans in-house, reducing the "aggravation factor" should be a priority, Mr. Larsen said.

Moving servicing in-house can be expected to cut down on prepayments and save the company money, Mr. Plank said.

"The most crucial component of any lender is (its) communication link with the customer," Mr. Plank said. Bringing servicing in-house reduces delinquencies and increases retention, he said. "You watch your own kids better than your neighbor's kids," he said.

All in all, Aames' new strategy is likely to result in a better capitalized company and one that has more appeal for a bank or thrift buyer, analysts said.

The company is "still in discussions" with several potential buyers, Mr. Thompson told investors. Washington Mutual Inc. has been rumored to be interested.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.