First Union Corp. handed Southern Pacific Funding Corp. a $300 million warehouse facility last week, furthering the bank's commitment to the subprime lending industry.

Southern Pacific, Lake Oswego, Ore., will use the line to fund first- and second-lien nonconforming loans, the company said.

The new facility "increases Southern Pacific's funding capacity while decreasing borrowing costs," said Robert Howard, Southern Pacific's chief executive. Southern Pacific now has more than $1.3 billion in total global warehouse financing facilities, the company said.

Southern Pacific and others have been rumored to be strapped for cash in recent months, as equity markets for these lenders tightened following writedowns at several companies.

First Union's move marks the third time in a week that a bank has stepped in to help a specialty finance lender. First Union's deal comes on the heels of Sovereign Bancorp's $10 million investment in ailing high loan-to-value lender Mego Mortgage Corp. and Bay View Capital Corp.'s $300 million deal to purchase of PSB Lending Corp., another high LTV shop, on June 10.

But banks' recent involvement in the mercurial specialty finance industry could be coming at exactly the wrong time, some say.

In fact, the risk for future writeoffs increases every day that the interest rate environment remains as it is, according to an CIBC Oppenheimer report released late Monday.

The current flat yield curve and declining rate environment are "extremely detrimental" to home equity lenders, said analysts Steven Eisman and Vincent Daniel in a report titled "Home Equity Industry: From Bad to Worse."

The report recommended that investors avoid companies that rely on gain- on-sale accounting, including Southern Pacific, Mego Mortgage, and much of the subprime mortgage group.

Many banks and investment banks are taking the opposite approach. The possibility of higher returns is luring funding, especially from corporate finance and asset-backed divisions.

First Union, Charlotte, N.C., has spent the past year beefing up its involvement in the business, first by securitizing nonprime loans in a partnership with Freddie Mac, then by purchasing Money Store, one of the largest originators of such loans, this year.

The bank "seems to be very aggressive in its initiatives" in the subprime sector, Southern Pacific's Mr. Howard said, as do several other commercial and investment banks.

First Union officials were not available to comment

Chase Manhattan has added several subprime or high LTV experts to Chase Securities in the last year.

Meanwhile investment banks have been scrambling to secure securitization business from home equity lenders.

Southern Pacific has been courted by a "number of financial institutions, including several banks" interested in providing funding or securitizing loans, Mr. Howard noted.

The finance company is focusing on expanding in the United States through acquisitions, he said. "We're focusing on strong management teams," he said.

Additionally, Southern Pacific is looking to lower its cost of production, Mr. Howard said.

"We've built up the volume, now we're looking to fine-tune," he said.

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