With a boost from Freddie Mac, big mainstream mortgage lenders are using Wall Street securitizations to ramp up their subprime lending efforts.
Greenwich Capital Markets last month securitized $411 million of bonds backed by subprime loans originated by Norwest Mortgage. The second and largest subprime securitization for the Des Moines unit of Wells Fargo & Co. was followed by Countrywide Credit Industries' biggest subprime deal, an $847 securitization underwritten by Lehman Brothers. Chase Manhattan Mortgage Corp., which securitized $580 million of subprime loans in June, is planning another large deal in the near future, a spokesman said.
The flurry of activity marks a change in how loans to borrowers with less than pristine credit are funded. A liquidity crisis last year decimated the ranks of subprime specialists, which depend on the secondary market to fund their loans. And big companies have an important advantage as the market revives.
"These deals are large enough that it supports a diverse buyer base," said Daniel Wallace, vice president of mortgage trading at Lehman Brothers. In Lehman's latest subprime securitization, he said, buyers included money managers, hedge funds, banks, and thrifts.
The deals also underscore an increased role by the government-sponsored enterprises, which were created to provide liquidity in the home loan market. Both Freddie Mac and Fannie Mae have been investing in subprime securities, traders say. And Freddie Mac has gone a step further, providing guarantees, or "wraps" on the subprime loans being sold.
Freddie Mac guaranteed Norwest's latest securities as well as a recent $794 million securitization of loans originated by Ameriquest Mortgage Co., a subprime lender in Orange, Calif.; the loans were securitized by Lehman Brothers.
Freddie has done five "T-series," or subprime, deals this year valued at $3 billion, said Faith Schwartz, director of alternative markets at Freddie Mac. Since Freddie began the program in 1997, the company has done 19 deals valued at about $5 billion, she said.
"We're very selective still on how we operate this T- series," Ms. Schwartz said. Freddie examines loan performance, credit, collateral, prepayments, the counterparties, and origination and servicing strategies, among other factors, she said.
In addition to the partners in the two latest deals, Freddie has worked with First Union Corp., New South, BankBoston Corp., and Option One Mortgage Corp.
Meanwhile, Fannie Mae said it is steering clear of the subprime guarantees. "We have not engaged in doing B&C wrappers," said Frank Demarais, vice president for product development. "We're not transacting business with what would be considered the subprime lending community."
But the lines between prime and subprime are blurring as some of the nation's largest originators -- including Chase Manhattan Mortgage, Norwest Mortgage, and Countrywide -- are building business by referring to their special units customers that don't qualify for an A-loan.
Norwest's subprime unit, Directors Acceptance, "is doing a better job penetrating that market -- that's a business that we anticipate growing," said Tom Neary, executive vice president of capital markets at Norwest Mortgage. Norwest's first subprime deal came to market in April 1998, when the company securitized $220 million of its loans privately through Norwest Asset Acceptance Corp.
"Norwest has a huge advantage in terms of originating this paper, just from borrowers who are rejected from their A-quality business," said a Wall Street mortgage trader familiar with the latest subprime transactions. "They set up their subprime unit to really capture that runoff."
The latest Norwest deal follows the recent pattern in which originators sell whole loans to Wall Street and let the Wall Street firms take on the risk of repackaging the loans, securitizing them, and selling them to investors, the trader said.
Norwest is flexible on which loans it will bring to the secondary market, said Mr. Neary. "We look at the hold versus sell analysis daily," he said. The company went ahead with its latest deal because "We felt that given what our return requirements were, that it was an appropriate time to sell."
An originator will typically separate the collateral into conforming and jumbo-loan balances, and Fannie and Freddie can buy the conforming loan balance security, the trader explained.
Both Fannie and Freddie are "very, very big investors" that buy AAA securities backed by B&C loans, the trader said. "By investing in that sector, they've had a much greater impact than their involvement as a credit provider, or wrap provider," he said.