Resource of S.C. Buying a Western Subprime Lender

Resource Bancshares Mortgage Group is increasing its efforts to become a leading subprime lender.

The Columbia, S.C., mortgage bank, a spinoff of Resource Bancshares, is acquiring Meritage Mortgage Corp., a wholesale originator of subprime loans.

Meritage, based in Portland, Ore., has origination offices near several large western cities, including Denver, Seattle, and San Jose, Calif.

The deal is valued at as much as $15 million - $2 million in cash plus up to $13 million in stock at current prices.

Steven F. Herbert, chief financial officer at Resource Bancshares Mortgage Group, said Meritage would bring his company its first subprime offices in the West.

The company started a subprime division in its six retail offices last summer and hired Larry Reed to head it. Mr. Herbert said the company was completing the rollout of subprime products to its wholesale offices.

Since the formation of the unit, Resource has produced about $3 million of subprime loans a month. Mr. Herbert said the acquisition of Meritage was Resource's first step toward significantly building subprime volume.

Meritage, formed in November 1995, produced about $107 million in subprime loans in 1996 - about $40 million of them - in the fourth quarter, and is counting on further increases from Meritage.

For the stock part of the Oregon deal Resource would issue 499,000 shares initially and 427,000 30 months later if Meritage met certain production goals. The transaction should close by March.

Gareth Plank, analyst with UBS Securities, said the deal gives credibility to Resource's subprime push. He added that the geographical expansion could help the company originate more conventional loans in the West, as well.

Mr. Herbert said Meritage is also expanding into retail production. It started a small telemarketing unit about three months ago.

Resource, which as of midyear was the ninth-largest originator of mortgage loans, is one of several large mortgage banks that have entered the subprime fray, attracted by the higher profit margins.

Last fall Countrywide Credit Industries, the second-largest originator, started a subprime retail division, and North American Mortgage Co. formed a partnership to enter the subprime arena with Contifinancial Corp., one of the subprime industry's leaders.

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