Amresco Residential Capital Markets, an acquirer of sub- prime mortgage portfolios, will begin mining nonconventional loan pools to increase profits.
The Ontario, Calif.-based company has set up a division, Amresco Mortgage Securities Investments, devoted to investing in the riskier segments - the subordinated classes - of securitized loan portfolios.
Peter J. Levasseur, who will be heading the unit as managing director, expects the company to invest $100 million in the business in 1997. He is looking for a 15% to 17% rate of return from the loans.
The division will concentrate on jumbo loan pools first, purchasing the tranches with the lowest credit quality, known as the B tranches. "There's a lot more history there" than in the subprime mortgage market, Mr. Levasseur said.
Amresco's new division plans to get in on the ground floor - siphoning off the highest risk from a loan pool before it is brought to Wall Street, credit-enhanced and rated.
"We go right to the originator," Mr. Levasseur said, "and commit to buy the B pieces on a go-forward basis, instead of buying on the secondary market."
Amresco will investigate loan quality and generate its own performance estimates. Additionally, the company will take responsibility if the loan defaults.
In return, Amresco is hoping to reap several benefits, Mr. Levasseur said:
*Issuers will be able to predict the securities performance more accurately.
*Investors will be reassured that the loan pools have been inspected by another party.
*Securities can be fine-tuned to generate a predictable income.
Detractors worry about the feasibility of achieving a 15% to 17% return on these loans. "He's going to have to buy those things at a discount," remarked one analyst who covers the subprime lending arena. Investment yield for B traunches of jumbo loans averages 9%, the analyst said.
Jumbo loans are particularly vulnerable to prepayment, the analyst added, because their customers tend to be more financially savvy.
But Mr. Levasseur, who previously spent seven years at ITT Financial Corp., is not daunted.
"It's a pretty good time to be getting into the market," he said, citing the recovery of the California real estate market.
Initially, Amresco will be purchasing the traunches as a company investment only. But eventually, Mr. Levasseur said, the product may be marketed to pension plans.