J.G. Wentworth wants to create a secondary market for private mortgage notes-loans that are originated by relatives or other investors when established lenders balk.
The effort by Wentworth, whose owners include ING Baring of the Netherlands, one of the world's biggest banking companies, could legitimize what has long been on the periphery of the mortgage business, backers say. They said the effect could be similar to that of Fannie Mae and Freddie Mac on the conventional loan business.
"Our aim is to allow more people to purchase homes at more affordable rates," said Michael Goodman, chief operating officer of the Philadelphia company.
The program targets the countless deals that are privately negotiated between people such as farmers or urban buyers who do not meet conventional credit standards or do not want to deal with banks or subprime mortgage lenders.
"These people for the most part have the ability to pay back the loans, but they don't meet certain criteria like net worth or long-term employ," Mr. Goodman said.
Mainstream mortgage bankers say the plan is fraught with regulatory and operational challenges, but if handled properly could complement traditional home lending practices.
"It's an exciting concept that could add liquidity to the marketplace," said Marc Smith, president of the Mortgage Bankers Association of America.
Lenders could ultimately end up participating by helping sellers arrange financing for the buyers, said Mr. Smith, who is also president and chief executive officer of Crestar Financial Corp.'s mortgage company. "You could see a lot of mainstream mortgage companies moving in that direction."
J.G. Wentworth set the program in motion this summer by purchasing privately negotiated mortgages, repackaging them, and then selling them to several large investors. Right now the buyers are subprime lenders, who are most familiar with this kind of borrower, but Mr. Goodman sees more banks investing in this paper as it becomes more available and proves itself a viable investment.
Though no hard figures are available, most estimates put the amount of mortgages handled as private transactions at about $1 billion a year. The transactions are most common in Midwest states, where farmers have long struck deals with one another, and in inner-city areas where couples buy the home of a relative and then make regular mortgage payments to that individual.
Wentworth's role is to bundle these notes into whole loan packages or securities. Fannie Mae and Freddie Mac have long taken this approach, funneling large volumes of conventional loans to ready investors and, because of volume, reducing rates paid by borrowers.
Mr. Goodman estimates that 200 basis points could be shaved from mortgage notes if the products were made more liquid.
Greater visibility could indeed drive down interest rates on these loans, which are now typically as high as-if not higher than-subprime mortgage rates. "To the extent it becomes more standardized, there is the potential for more people to take the approach," said Douglas Duncan, director of research at the mortgage bankers' group.
J.G. Wentworth made its name as a large-scale buyer of accident settlements, and believes its prowess at putting together sellers and investors "gives it a competitive advantage" in pioneering the private mortgage note business, according to a filing with securities regulators.
But the company also acknowledges challenges, including reconciling underwriting standards for the home-grown loans, ensuring accurate appraisals, and making sure certain lending standards are set.
Indeed, at least one veteran banker said the challenges would be difficult to meet, if not impossible, because lending standards and loan rates will vary so much among the mortgages.
But Mr. Smith of the MBA said the concept was at least worth exploring. "Mortgage lending has always been an entrepreneurial industry," he said. "This is yet another example."
