Like so many of its counterparts, Amresco Residential Mortgage Corp. is looking to turn itself around.

The troubled home equity arm of Amresco Inc. turned to Lehman ALI Inc. in July to form a joint venture, Finance America of Irvine, Calif., hoping that Lehman's money and management would breathe life back into the wounded unit.

Brian L. Libman, a 13-year veteran and former managing director of Lehman Brothers, was brought in to lead Finance America as its chief executive, and industry observers say he has his work cut out for him.

"Even as the equity and capital markets come back for other sectors, it's going to be quite a while -- if ever -- that there's going to be the same access to capital in the home equity sector," Mr. Libman said. "The only alternative to accessing capital is to have an incredibly strong, deep-pocketed parent. That's why you're seeing Washington Mutual buy Long Beach and NatCity buying First Franklin." Eventually, he said, the home equity sector "is going to get integrated into the prime sector or the thrifts or the banks."

Moody's senior analyst and vice president Steven C. Nelson said the operation is suffering "not just from a liquidity standpoint but from an operational standpoint. "It's not surprising that they've had the problems they have had with aggressive growth and underwriting and weaker operating and risk management controls," Mr. Nelson said. "Lehman Brothers may see some potential in the operation that others have not seen." For example, Finance America can provide new product for Lehman to securitize, he said. That perspective may be what Finance America needs to stay afloat.

"Ultimately, the terms of the arrangements are most likely very favorable to Lehman," Mr. Nelson said.

Industry specialists said that Amresco Residential's problems were many: It was experiencing high levels of loss through its correspondent channels and suffered from weak underwriting guidelines and risk management. And the parent was not paying as much attention to its operations as needed.

Peter J. Levasseur, Amresco Residential's president, is to be president of the new venture, which will eventually replace the Amresco unit. He said that, though Lehman's capital ensures Finance America's existence, it doesn't necessarily ensure its success.

"In order to survive in the future, we have to become far more cost-conscious and far more efficient than we've been in the past," Mr. Levasseur said.

Because of its focus on earnings and growth, and prior to the home equity blowup last fall, the unit had been an important contributor to Amresco's earnings growth, and Amresco had been willing to spend the capital needed to pay for that growth. But after liquidity became scarce, an infrastructure and platform were left in place, along with an in-house servicing platform, with nowhere to go.

"As volume increased," Mr. Libman explained, it appeared that earnings were increasing, though the company was "becoming more and more cash-flow negative."

Though "we have access to capital now, we need to manage the amount of negative cash flow and turn the company from negative to positive cash flow," he said. "We're not using the securitization market as an exit strategy, we're using it as the financing vehicle."

Amresco Inc. is currently under due diligence to have three of its business platforms bought by the Australian Lend Lease Corp. These are asset management, commercial mortgage banking and servicing, and real estate structured finance. Prudential Securities analyst Jonathan Adams said that, though Finance America would not be part of the transaction, it could be affected in the long term.

"Amresco Inc. had used some of its divisions to support the operation of other divisions," Mr. Adams said. "The home equity unit made no money in 1998, and it was the commercial units that supported Amresco last year. The change in the capital structure of the corporate entity could affect the home equity unit on a long-term basis."

Mr. Levasseur said that before Lehman stepped in Amresco Residential never knew who would pick up its loan packages to securitize them and thus never knew how they should be priced. Now Lehman will work closely with Finance America to underwrite loans, insuring that they will be securitized.

"Beyond that, unlike any A market, in the subprime world you never know what your price execution is going to be on the back end," Mr. Levasseur said. "This joint venture allows us to have a far better sense of what kind of loans we should be originating from a quality perspective."

ABN Amro analyst Robert P. Napoli said the venture would serve to reduce balance sheet risk but added that the key would be to get costs down to about 2.5% of the base amount of a loan, from the current 3%.

"I think Lehman will be heavily involved in that business, helping to formulate the underwriting guidelines and making sure that the loans originated meet the criteria that they want for securitization," Mr. Napoli said. "It wouldn't make sense any other way."

Mr. Libman said Finance America is analyzing all aspects of its business.

"We've hired a consultant to help us analyze every single thing we do to make it more efficient and figure out what we're doing wrong," Mr. Libman said. "That included the entire approach of how to originate a loan. The committed capital lets us start on a clean sheet of paper and decide how we're going to do it going forward."

Mr. Levasseur said that strategy does not necessarily imply aggressive growth.

"Our strategy is really focused toward making money and becoming more efficient," Mr. Levasseur said. "I don't think we really care whether or not we have the largest production volume in the industry."

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