In the eternal quest for fat profits, most lenders are climbing over one another to make high-margin mortgages to borrowers with less-than-perfect credit.
But at least one prominent lender has expressed a decided preference for other, less-crowded lines of business.
Preferred Mortgage, Irvine, Calif., has carved a niche for itself by making high loan-to-value home equity loans to borrowers with excellent credit. Because of the high ratios, the loans carry premium rates, making them more lucrative than traditional mortgages. But the borrowers' high credit quality and the small size of the loans Preferred makes means they are less risky than B and C loans, says chief executive Todd Rodriguez.
In 1994, after the refinancing boom dried up, Mr. Rodriguez said, he toyed with the idea of making B and C loans but quickly dismissed it.
"A lot of big players are getting into B and C lending," Mr. Rodriguez said, "but we don't want to follow the others. We've always been an A lender. We looked at B and C but never understood it," he said.
Instead, Mr. Rodriguez turned to the equity loans with high LTV and high credit quality, loans it has been originating since July 1994. The product has the high rate spreads that other lenders are looking for in B and C lending, but the niche attracts little competition.
Preferred makes loans with an average size of $35,000, will not lend more than $100,000, and will lend up to 100%?? of a home's value. The lender also originates a large volume of government loans, which bring larger profits than do Fannie Mae and Freddie Mac loans, he said.
"I decided not to stay in the rat race," Mr. Rodriguez said of his decision to focus on the uncommon loan product. "The key for us was finding a niche we understand, and being a leader in that area."
Mr. Rodriguez, a third-generation mortgage banker, worked for his father after graduating from high school. He decided to strike out on his own in 1989 and started Preferred when he was a mortgage broker. The company's staff has grown from 35 employees in 1994 to more than 300 now.
His business grew exponentially during the refinancing boom and now has offices in Southern California, Northern California, and Denver and lends in 24 states. Some 90% of the lender's volume comes from California, but Mr. Rodriguez said he would like to see the state account for just 30% eventually.
Preferred has begun marketing efforts in Idaho and North Carolina and is testing markets in Oregon and Washington.