Traditional lenders swarmed to a session on subprime lending at last week's Eastern Secondary Market Conference only to hear specialists warn them of the pitfalls of the business.
The market for loans to less creditworthy borrowers has taken off over the past couple of years, putting pressure on mainstream mortgage lenders to get involved. "Almost no one in prime isn't already in or looking very seriously at subprime," said Warren Raybould, senior vice president at GE Capital Mortgage, Raleigh, N.C.
But speakers at the conference, sponsored by the North Carolina Bankers Association in Raleigh, said the higher-yielding business requires closer monitoring than traditional lending.
"This can be a very profitable and low-risk business to be in," said Michael W. Sawyer, senior vice president of Saxon Mortgage, a subprime lender based in Glen Allen, Va. "But if you try to capture volume and don't worry about collections-it's been nice knowing you."
Indeed, strong-arm collection tactics can be indispensable to B and C lenders, said Dennis G. Stowe, president of Meritech Mortgage Services, Fort Worth. "You're dealing with very experienced borrowers" who know how to duck payments, he said. "It can become a game with them."
Mr. Stowe said lenders should prepare themselves for very steep collection costs, with servicing costs averaging $248 a year, compared with $68 annually on conventional loans.
Lenders should stay in very close contact with subprime borrowers, calling them within days of a missed payment, Mr. Stowe said. "You want to find out who can and can't pay as quickly as possible."
The loans must pass muster with Wall Street, which looks for sound underwriting and aggressive collections, said William K. Komperada, a managing director at subprime lender Long Beach Mortgage, Orange, Calif. "Everything you do during originations should be geared toward the capital markets," he said.
The business is very different from conventional lending, and subprime chiefs are worth listening to, said Marc Smith, president of Crestar Mortgage Corp., Richmond, Va. "These are people whose insights you want."
Others said the business is simply too dicey for them.
"I don't subscribe to a lot of it," said Paul S. Reid, president of American Home Funding, Richmond, referring to the fast-growing practice of offering more high-rate mortgages to people with poor credit. "I think a day of reckoning is coming for that market."
Mr. Reid, former president of the Mortgage Bankers Association, urged caution: "Don't get sucked in chasing yield."