Gearing up to enter the subprime mortgage business, Source One Mortgage Services has hired Frank Mohan, a Beneficial Corp. executive.
Making higher-yielding loans to people with poor credit would be a way for the Farmington Hills, Mich., lender to boost its lackluster returns of the past few years.
"This hiring does represent a confirmation of our change of direction," said James H. Ozanne, who was brought into the company as chairman this year by its parent, Fund American Enterprises. "We realize that the regular agency business has fairly low profitability."
Mr. Mohan succeeds James Conrad, the longtime chief executive officer, who announced his retirement this week. Sources said Mr. Ozanne had assumed most of the day-to-day control of the company.
Mr. Mohan had worked for Beneficial since 1963 and most recently was in charge of its subprime mortgage operations east of the Rockies.
Source One joins a growing list of conventional mortgage lenders that have decided to originate riskier subprime and home equity loans. Last year North American Mortgage Co. and Resource Bancshares Mortgage Group formed subprime divisions.
Mr. Ozanne said it is too soon to tell whether Source One will set up a subprime lending division. The company has established a relationship with Contifinancial, one of the nation's largest subprime lenders.
Contifinancial will train Source One's employees and assist Source One with originations and servicing of subprime loans.
In addition, Source One is working with FirstPlus Financial and Money Store to launch a high loan-to-value home equity product.
North American is also working with Contifinancial to get its fledgling subprime operations off the ground.
Analysts said Source One is wise to not go it alone in the B and C market. "They're doing it in a pretty measured way. Companies coming out of conforming mortgages have to rethink their thought processes," said David Graifman, a fixed-income analyst with Standard & Poor's Rating Group.
Source One sold most of its servicing portfolio to Chase Manhattan Mortgage this year but is subservicing the portfolio for Chase.
Mr. Ozanne said, however, that Source One has not been successful in adding subservicing business.
The rating agencies have taken notice. In May, S&P put Source One's debt securities on its CreditWatch list with negative implications, and Moody's Investors Service downgraded its ratings. This week Moody's announced it was reviewing $200 million of Source One's debt securities for another downgrade.
