As conventional mortgage companies step into subprime lending, they are finding they must forge new relationships on Wall Street.

The standard way of securitizing loans-working through Fannie Mae and Freddie Mac for guarantees and subsequent sales-doesn't really apply in the nonconforming arena.

Although the agencies are broadening their customer bases, they continue to be selective about the mortgages they will back, and loans to borrowers with bruised or limited credit don't necessarily meet their criteria.

As a result, most lenders that want to work with so-called B and C borrowers must deal directly with private conduits or investment banks that handle securitizations.

"It's a totally different environment" than working with Fannie Mae or Freddie Mac, said Robert C. Walsh, president of Walsh Securities, a midsize subprime lender in Parsippany, N.J.

"It's much more of a direct partnership with Wall Street," said Mr. Walsh, who has also dealt with conventional, Fannie Mae, and Freddie Mac loans during his career.

For subprime lenders, a close relationship with Wall Street is crucial because of the liquidity the Street supplies, Mr. Walsh said. "Companies want to get more cash proceeds, so they can do more lending."

The B and C market, which has more than $100 billion of securities outstanding, will continue growing, Mr. Walsh said. "You'll see more securitizations as loan volume increases and people get more comfortable with the process."

Walsh Securities, which is set to merge this year with Resource Bancshares Mortgage Group, originated $660 million of B and C loans in 1996 and securitized just one-third.

This year, the company is on pace to originate $1.4 billion and expects to securitize about 90%.

Lenders can take steps to make their operations more conducive to securitizations, investment bankers say.

For instance, smaller or new lenders should engage in whole loan sales to create a performance history that investment bankers can review, said Linda Blevins, vice president in the structured asset group at Smith Barney Inc. Managers who are well-schooled in subprime products and collection processes are also "very key"because the business is different from conventional lending, she said.

Ms. Blevins also looks at the financial condition of the company and its "overall lending philosophy." Her group will review assets and liabilities, underwriting standards, and program guidelines.

By running a tight ship, with a clear business plan and experienced management, lenders stand a better chance of finding their subprime securities welcomed by Wall Street, Ms. Blevins said. "If you meet the standards, the hurdles for entry are lower."

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.