Keycorp, which just weeks ago gutted its traditional mortgage business, is forming a finance company to make home equity loans to people with blemished credit histories.
The Cleveland-based regional bank has hired R. Harold Owens, the former president of Fleet Finance in Atlanta, to head the new unit.
The Keycorp move is emblematic of a flight to low quality by some large institutions as normal mortgage originations have become difficult and even unprofitable.
"Banks are waking up to the fact that this is a pretty good business," said C. Stuart LaDow, a consultant on home equity lending based in Allison Park, Pa.
Since the home-loan refinancing boom ended last year, lenders have been hungry for sources of mortgage originations to take up the slack. The highly competitive market that resulted has squeezed much of the profit out of originations.
Many institutions have turned to home equity lending, which is largely insensitive to interest rate fluctuations. The expansion of the secondary market has made it easier to avoid the risks of holding the loans, and this has helped to make the niche more appealing.
According to SMR Research Inc., a Budd Lake, N.J., consulting firm, large finance companies that specialize in this type of lending reaped an 18% to 19% return on equity. Banks have an average ROE of 14.63%, according to the FDIC.
Chase Manhattan Bank has been building its Chase Manhattan Funding, which specializes in the origination of second-quality loans.
The division of Chase Manhattan Mortgage Corp., Tampa, Fla., has increased its staff size fivefold to 25 since the beginning of this year. It now is originating more than $10 million of home equity loans per month.
Mellon Bank, through its Mellon Mortgage subsidiary, will be introducing a new program later this month to make loans to people with impaired credit.
It also may form a nationwide unit to make such loans, according to an industry observer familiar with Mellon's situation. Mellon is reportedly close to hiring a home equity bigwig, Jeffrey Larson, former president of CIT Group, Livingston, N.J., to head the new operation.
Industry sources say PNC Bank is also considering a jump into home equity lending.
But Keycorp's move is especially noteworthy, considering that it practically ditched its first-mortgage origination unit in February.
That was when the company got out of the business of servicing first mortgages. It sold its $25 billion of loan servicing to NationsBank Corp.
Keycorp coupled the sale with an elimination of about 250 staff positions, the closure of its wholesale and correspondent lending departments, and the scaling back its secondary marketing operations.
A spokeswoman confirmed that Mr. Owens has been hired by the company to start a finance entity. But she declined to provide further details, saying a broader announcement would be made in a week or so.
Mr. Owens will be president of the as-yet-unnamed new unit. It is expected to be part of a broad consumer finance operation that will include AutoFinance Group Inc., a "subprime" auto lender that Keycorp purchased last month.
Mr. Owens is a former president of Security Pacific Financial Services Inc., a San Diego-based home equity lender owned by BankAmerica Co.
More recently, he was president and chief operating officer of Fleet Finance, the Atlanta unit of Fleet Financial Group Inc., Providence, R.I.,