Lenders are increasingly shunning the securitization of home equity loans in favor of selling them whole, according to market sources.
Loans to borrowers with blemished credit are also being sold whole.
The change is a result of a voracious appetite by banks and thrifts for whole equity loans, spurred in part by recent changes in accounting rules, observers said.
"There is an active trade going on out there for whole loans," said Daniel I. Castro, director of asset-backed securitization research at Merrill Lynch.
So far this year, $2.1 billion of home equity loans have been securitized, according to Merrill Lynch. That's off last year's pace, when $10 billion of loans were securitized, according to Asset Sales Report, an American Banker newsletter.
Part of that drop is likely to be a result of an increase in whole loan sales, experts said.
Credit watchers are getting the most evidence of private whole loan sales. Nearly every credit-control firm has seen securitization deals that were presented for analysis only to be pulled before completion. The reason, they said: The loans are sold whole.
"There seems to be developing a market for B and C whole loans where there previously wasn't a market for them," said Jennifer E. Schneider, a vice president at Duff & Phelps Credit Rating Co., New York.
"I do know that there have been deals that I was looking at that went whole-loan," she added.
Second mortgages to first-quality borrowers are also being sold whole, observers said.
"If it continues, there may be as much business in the primary market as in the securities," said one Wall Street executive.
Investors have always bought whole loans, but that volume has changed little.
Banks and thrifts are providing newfound demand for the whole loans. Observers say it's Financial Accounting Standards Board rule 115, implemented last year by bank and thrift regulators, that is pushing banks to buy whole loans.
Marti Sworobuk, program manager for accounting and financial management at America's Community Bankers, an industry trade group, explained that FAS 115 requires banks and thrifts to mark to market all securities except those expected to be held to maturity. That means the value of the securities fluctuates on a financial institution's balance sheet according to market value.
However, the value of whole loans held for investment need not be marked to market.
Market insiders say some of the big names in banking have been buying whole home equity loans. Some names of purchasers proffered by sources are Chemical Bank, Nationsbanc, Bank of America, and Bank of Boston.
Prices are said to be very high for whole equity loans. Sources say banks are paying up to 10 points above par for whole loans.
"If you can get 10 points on a deal from day one, why securitize?" asked Scott M. Mannes, managing director, ContiFinancial Services Corp., New York.
Most of today's whole-loan deals are valued at "well under $100 million," said Merril Lynch's Mr. Castro.
Mortgage companies view whole loan sales as a faster way to get cash for their mortgages. Whole loan sales close more quickly than securitizations.
They are also cheaper to execute. And they are private transactions, out of the public's or a competitor's scrutiny.
One finance company CEO suggested that the mortgage banks selling their loans whole were those that could not afford to securitize.
Merrill Lynch's Mr. Castro said the bottom line is the determining factor for most mortgage banks.
"It is really an issue of cost of structuring versus how much you give up by selling the whole loans," he said. Increasingly, he added, selling whole loans is winning.