Though it called off plans to buy subprime lender Walsh Securities, Resource Bancshares Mortgage Group says it is still committed to the B and C business.
The Columbia, S.C., lender put the deal on hold in August to investigate allegations that Walsh funded mortgages for fraudulently appraised properties. Resource called off the deal this month.
Steven F. Herbert, the company's chief financial officer, said it intends to increase its subprime lending capabilities through Meritage Mortgage, a small wholesale company it bought this year.
"We are moving aggressively to expand our internal operations," Mr. Herbert said. In the first nine months of this year, Resource originated $230.2 million of subprime loans. If the Walsh deal had gone through, Resource's subprime volume would have more than doubled.
But even though the Walsh deal is dead, there have been rumors that Resource is looking to buy subprime residuals-assets that are similar to mortgage servicing, from Walsh.
Mr. Herbert denied that Resource plans to buy more residuals, but he said Walsh owes it nearly $10 million of receivables.
Observers predicted Resource would focus on its own subprime operations for a while, but would eventually look to buy another subprime company. Other sources said shareholders might pressure Resource to put itself up for sale.
"You get shareholders excited about a potential accretive acquisition, and then it doesn't happen," said E. Gareth Plank, an analyst with UBS Securities. That makes Resource "far more vulnerable to a takeover."
Investors bid up Resource's stock to an all-time high of $19.75 in late June. But after the allegations of fraudulent loans at Walsh surfaced, its stock fell nearly 40%, bottoming out at $12.125 in late October. It was trading Wednesday afternoon at $13.125.
Mr. Plank said if mortgage rates continue to fall, a bank may look to buy Resource to gain a loan source to replace runoff in its servicing portfolio. Resource originated $7.8 billion in mortgages in the first nine months of this year.
One large institutional shareholder said though the aborted deal may be a black eye for the company, it shows that Resource had the sense to pull out.
"I'd much rather have them look closely and decide to walk away than go ahead with what turns out to be a bad deal," said Rick Lawson, vice president of Wallace R. Weitz & Co. The Omaha-based investment firm owns about 700,000 shares-or nearly 3%-of Resource.