Long Beach of Orange, Calif., has carved itself a niche in the growing business of originating, securitizing, and servicing loans to borrowers with blemished credit histories.
The company is in the process of issuing $255 million of mortgage-backed securities through Greenwich Capital Markets, a Connecticut investment bank. It is Long Beach's second such issue of the year.
These types of issues, a partly because they offer higher interest rates to investors, are increasingly popular. "Over the next couple of years, we'll probably see more" of such issues, says Jayme Laurash, an analyst with Standard & Poor's Corp.
|Slower Repayment Profile'
Securitizations of loans to homeowners with troubled credit histories, known as B and C borrowers, are attractive to investors for other reasons as well, says Jennifer Schneider, an analyst at Duff & Phelps. "These borrowers have a slower prepayment profile than A borrowers," she said.
This is thought to be because B and C borrowers have less access to refinancings and have little excess cash. Also, because they pay higher closing fees, it takes a bigger drop in rates to make refinancing economical.
Investors have been stung by prepayments in recent months. Thus, the likelihood of greater stability is a seductive feature.
Extra Work Required
Though mortgage banks that make loans to borrowers with a history of credit trouble can be well compensated by higher interest rates and fees, these loans also require extra work, both before and after the loans close.
B and C borrowers are generally required to make higher down payments, resulting in lower loan-to-value ratios. According to Ms. Schneider, this gives added collateral to investors but makes a accurate appraisals all the more important.
Besides the standard appraisal checks, banks like Long Beach use tools such as desktop appraisals, computer programs that take into account valuation of similar properties nearby.
"Agrressive servicing is key," says one old B and C hand.
"It's more lime consumer loan servicing, you have to stay on top of things," says Mr. Laurash.
Long Beach has been known to get in touch with borrowers before the first payment is due to remind them of the correct amount and address. Long Beach also makes it a point to phone borrowers as soon as possible after they become delinquent.
Though making mortgage loans to B and C borrowers has been the province of a small band of specialists, market observers believe the ranks are expanding.
"We see a lot more proposals of originators that want to start these types of programs" says Ms. Schneider.