The Subprime Boom - Can it Last?

A funny thing happened last year in the mortgage market - as total loan originations declined by 28%, the subprime production market continued to chug along like a runaway train.

According to figures compiled by this newspaper and its affiliate, National Mortgage News, all residential lenders funded $2.7 trillion in loans last year, compared to the record year of 2003 when lenders of all different stripes originated $3.7 trillion.

In subprimeland, fundings soared to a record $587 billion in 2004, compared to $390 billion the year before, a mouthwatering gain of 50%.

How can this be? Well, that's an interesting question. And here's a few possible answers: subprime lenders are refinancing their own clients every year because rates keep falling and it's a good deal for Joe and Mary Six-Pack; subprime lenders are terrific marketers and are sucking in more customers than ever before; prime firms and Wall Street conduits have joined the fray, increasing liquidity in the market; the Bush economy which resulted in record job losses created a never ending supply of "new" subprime borrowers that didn't previously exist; home values have increased so much the past three years that certain subprime borrowers have more equity to tap than ever before.

Now, which one of these answers is the chief reason for the robust subprime market? That's hard to say, but if anything is certain subprime lenders are hungry, hungry, hungry. Take the market leader, Ameriquest Mortgage, for example. The California-based Ameriquest (a privately held non-depository) funded a record $75 billion last year - a stunning accomplishment for not just any lender but an amazing achievement for a subprime firm.

Ameriquest didn't have a record year because its name begins with an "A" and it's listed first in the telephone book. It markets its brand from coast-to-coast, leaving no stone unturned. Not only did the company buy the naming rights to the Texas Rangers ballpark, it also owns the right field fence at Camden Yards and several other sporting arenas. Click on the Internet and you can find the Ameriquest brand advertised all over the place - as well as on TV and radio.

And the company doesn't stop there either. It aggressively markets the name of its wholesale division, Argent Mortgage, to the loan brokerage community. In short, Ameriquest lives by the edict: you rest, you rust.

It isn't alone. Many nonconforming lenders have followed its lead, plastering their brand name all over the place. (You can include Countrywide in this club as well.) The result? People know who they are and line up for loans.

Take a look at any top-ranked lender. Chances are if they aren't marketing their name and message, they won't be a top-ranked lender for long. Yes, advertising works - just look at Ameriquest, which has a market share of about 12%.

But branding, again, isn't the only reason why subprime volumes have soared. Production has soared because the industry has recognized a need and created a product that serves that need. Having a sweet yield curve - at least until recently - hasn't hurt.

Of course, chances are all sorts of non-subprime loans are probably being lumped in with the B&C totals. Several industry executives have told us that there appears to be a fine line of distinction between "alt-A" and subprime, depending on who's doing the talking. The only thing we can ascertain for sure is that alt-A loans have higher FICO scores than subprime.

But yes, subprime is here to stay. The industry as a whole has cleaned up its act and is trying its best to keep out of trouble. Will it last? Will the market crash and burn like it did back in 1998? We shall see. As long as there's equity to tap, Americans will put their mouths under the spigot, asking the bartender to fill it up again, please.

Paul Muolo is executive editor of both Mortgage Servicing News and its affiliate, National Mortgage News.

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