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Tuesday, Sep 26, 2023

High risk

The announcement last month that Countrywide Credit Industries Inc. will begin refinancing mortgage loans to people in bankruptcy or foreclosure is a significant departure for the conventional mortgage lender. While lending to consumers with credit problems, otherwise known as “sub-prime” borrowers, has been around for a long time, most conventional lenders have drawn the line at refinancing mortgage loans to people in bankruptcy or foreclosure. But Countrywide is finding that, as with other “sub-prime” products, mortgage refinancing can be a lucrative business. Through its Calabasas-based subsidiary, Full Spectrum Lending, which will actually handle these types of loans, Countrywide will charge interest rates somewhere above 10 percent for those in bankruptcy or foreclosure. Loans to customers who are good credit risks are in the 7 percent range, depending on the size of the loan and the going market interest rate. That’s because competition among borrowers for those with strong credit histories, along with interest rates that are among the lowest in the decade, are helping to keep the rates down. Though Countrywide isn’t alone among conventional mortgage lenders to offer sub-prime loans NationsBank, in Charlotte, N.C., also recently started refinancing these mortgages it’s ahead of a growing national trend, analysts said. “This is not a new business, but as far as conventional lenders, (Countrywide) is out in front,” said Gareth Plank, an analyst at UBS Securities LLC in San Francisco. “This is a logical extension for most mortgage lenders.” Countrywide’s other sub-prime loans already account for as much as 30 percent of the company’s revenues, Plank said, though they represent less than 10 percent of the lender’s overall mortgage portfolio. Full Spectrum, which has been offering other services to sub-prime borrowers for the past two years, is mostly targeting existing customers who may have fallen onto hard financial times, but have a history of good credit. These customers do not make up a large percentage of the lender’s business base, but they do offer room to grow in new refinancing products. Personal bankruptcy filings in L.A. County are at record levels nearly 100,000 last year. By servicing additional customers, Full Spectrum can also sell its loan-related products, such as appraisals, title and escrow services. Full Spectrum plans on opening 30 new offices nationwide this year. Countrywide spokesman Mark Benhard indicated that the scope of the new lending will represent less than 5 percent of Full Spectrum’s loan portfolio. “It’s not a very large segment of our portfolio,” Benhard said. What’s kept mortgage lenders out of this market in the past has been the risky nature of lending to people with bad credit histories. Previously, if a customer defaulted on a loan, the lender would lose most of its investment. Today, however, more and more lenders, including Countrywide, only originate and service the loan, earning fees and a portion of the interest on the loan. They then sell the actual loan to a third-party investor, who assumes the risk. The original lender’s reputation is still on the line if a lot of these sub-prime loans start going sour, the investors may cut off the company that originates them. But Countrywide’s slow pace in entering this new market and its reputation among investors as a cautious and well-managed company should help minimize that risk, analysts said. “Since they don’t have to take the credit risk,” said Plank, “it’s a pretty savvy business.”

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