Norwest Mortgage, already the largest servicer of mortgage loans, is hoping that its subprime division can soon become a dominant servicer of B and C loans.

Judith Berry, president of Directors Acceptance, the Carlsbad, Calif.- based subprime division of Norwest Mortgage, said Directors is starting to retain more servicing of the loans to less-creditworthy customers as opposed to selling it off.

Beginning in the third quarter, Ms. Berry said, Directors will securitize loans through Norwest Asset Securities Corp., Norwest Mortgage's Frederick, Md.-based conduit.

For the time being, the servicing of Directors' subprime loans will be performed out of Norwest Mortgage's Riverside, Calif., servicing center.

Directors' decision to service more such loans comes at a time when several subprime lenders have reported rising delinquencies. This has cast doubt about the credit quality of subprime borrowers.

But Ms. Berry said a specialized default management team is being put together to handle the unique challenges posed from servicing B and C loans.

"We've got the capability. Now we want to build the actual volume," she said.

As Directors' subprime production volume increases, more of these loans will be fed into the company's servicing portfolio. Directors is on track to originate $500 million in subprime loans this year, Ms. Berry said.

And once origination volume is large enough, Ms. Berry said, Directors will most likely create a separate system for servicing subprime loans. This would also enable Directors to start building a base of subservicing clients, she added.

Subservicing is a form of outsourcing. Companies that wish to retain the ownership rights on the loans in their portfolio but not perform the servicing functions, pay subservicers to service the loans.

The bulk of Norwest's subservicing volume comes from the portfolio of jumbo loans owned by Prudential Insurance Company of America. Norwest bought Prudential's mortgage subsidiary, Prudential Home Mortgage, last year but did not purchase the portfolio of jumbo loans.

"Norwest is a very large subservicer, and we want to grow it on the B and C side," Ms. Berry said.

Gerry Risi, senior vice president of Fort Lauderdale, Fla.-based CoreStates Capital Markets, said Norwest could fare well in the subprime subservicing arena because there is very little competition. Subservicing of conventional A paper, on the other hand, is becoming an increasingly crowded market.

Advanta Mortgage USA and Wendover Funding are two of the few companies in the B and C subservicing business. Last week, Electronic Data Systems announced that it was acquiring Wendover.

Mr. Risi said Norwest's biggest expense would be finding employees with experience servicing subprime loans.

"If Norwest throws enough assets at it, they can get the job done," he said.

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