Aames Financial Corp. is dumping a controversial accounting method and selling off residuals and servicing, the home equity lender announced last week in its earnings statement.
In part because of the accounting change, net income for the quarter ended Dec. 31 was $13.3 million, down about 27% from $18.3 million the year before.
The Los Angeles company virtually eliminated its reliance on gain-on- sale accounting, which lets lenders book lending profits before they are received. Several subprime mortgage lenders have had to take massive writedowns recently when loans were repaid faster than expected.
"This represents a fundamental change in the way that we do business," said Cary H. Thompson, Aames' chief executive. "We intend to focus on the sale of whole loans in the secondary market to generate cash."
The recent formation of several real estate investment trusts, or REITs, with "voracious appetites for mortgage product" is expanding the whole-loan market, Mr. Thompson said.
Aames intends to sell whole loans to buyers for cash and retain the servicing rights. The company may also open an REIT of its own, which would pay cash dividends, Mr. Thompson said.
During the first quarter, Aames will also sell to Ocwen Asset Investment Corp. the residuals and servicing for up to $600 million of loans it originates or buys, the companies announced last week. Ocwen Asset Investment is a subsidiary of distressed-asset specialist Ocwen Financial Corp., West Palm Beach, Fla.
In the agreement, Ocwen would have the right to review and accept these loans before securitization and Aames would service performing loans while Ocwen Federal Bank, a wholly owned subsidiary of Ocwen Financial, would service the nonperformers.
Terms of the deal are still being negotiated and should be resolved in the next few weeks, the companies said.
Loan originations for the quarter totaled $616 million, down 2% from the previous year, because of the company's decision to reduce correspondent lending.