mortgage banks' entry into the risky but lucrative business of lending to credit-impaired borrowers. S&P gives details on how banks can reduce the risks of originating and servicing lower-end loans and jumbo loans. Its step into providing guidance in these markets is seen as a way of creating uniformity for an industry whose loans are now sold according to a variety of specifications. The measures dovetail with a newly announced program that uses Freddie Mac technology and S&P risk models to provide evaluations of nonconforming loans for originators. "I definitely think this will comfort and encourage a lot of people," said Hugh Miller, president of Delta Funding, a Woodbury, N.Y., company that buys substandard loans from mortgage banks. Until now, "everything has been very different," Mr. Miller said. "That confused a lot of lenders." S&P issued the guidelines in response to increased inquiries from lenders about offering so-called B and C loans, said Frank Raiter, managing director of the firm's structured finance group. The approach was a way of creating standards for the industry, he said. Lenders have been eager to find new lending areas because of the decline in originations this year, and many have embraced subprime lending. S&P's words are sure to carry weight, since it is the largest issuer of credit ratings for mortgage loans. Mortgage banks need a positive rating before they sell their nonconforming loans into the secondary market, an approach almost all prefer to keeping the loans on their books. Right now, the market for B and C loans is believed to be below $50 billion annually. That market could grow, with the right impetus, to $70 billion within the next couple of years, said Regina J. Reed, senior manager of the national mortgage finance group of KPMG Peat Marwick. Speaking at an industry conference in September, Ms. Reed and others spoke of the rewards - in the form of significantly wider spreads and higher fees - while noting that lax underwriting standards could lead to significant red ink. S&P's guidelines are meant to help improve lenders' chances of detecting significant risk of default. The guidelines, which are separate from the program with Freddie Mac, were issued last month to subscribers of S&P's credit newsletter. The measures pull together and modify a number of items that S&P had previously considered when evaluating nonconforming loans. The cohesive approach was necessary to note the "inherent differences" between lower-end loans and A-quality borrowings, Mr. Raiter said. S&P wants the guidelines to be widely adopted, especially by lenders that plan to use the company's services. "Does the company's B program match our definition of a B-quality loan? If not, adjustments to the credit classification are made," the standards state. S&P doesn't believe the B and C business, because of its increased risks, is for unseasoned lenders. Companies must have at least three years' experience with B and C loans, the agency's standards state. S&P will make exceptions for companies that, though short of B and C experience, do have "a well thought out, prudent product line and market approach and knowledgeable and experienced management and staff," the guidelines state. The company also believes that the lender should not use its conventional-mortgage quality-control people and processes to judge nonconventional loans. "A quality control department should operate as a separate entity and perform a monthly post closing review," the standards state.

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