Magazine article American Banker

S&P Setting the Tone for Subprime Loan Market

Magazine article American Banker

S&P Setting the Tone for Subprime Loan Market

Article excerpt

A set of standards issued by Standard & Poor's Corp. could accelerate mortgage banks' entry into the risky but lucrative business of lending to credit-impaired borrowers.

S&P gives details on how banks can reduce the risks of originating and servicing lower-end loans and jumbo loans. Its step into providing guidance in these markets is seen as a way of creating uniformity for an industry whose loans are now sold according to a variety of specifications.

The measures dovetail with a newly announced program that uses Freddie Mac technology and S&P risk models to provide evaluations of nonconforming loans for originators.

"I definitely think this will comfort and encourage a lot of people," said Hugh Miller, president of Delta Funding, a Woodbury, N.Y., company that buys substandard loans from mortgage banks. Until now, "everything has been very different," Mr. Miller said. "That confused a lot of lenders."

S&P issued the guidelines in response to increased inquiries from lenders about offering so-called B and C loans, said Frank Raiter, managing director of the firm's structured finance group. The approach was a way of creating standards for the industry, he said.

Lenders have been eager to find new lending areas because of the decline in originations this year, and many have embraced subprime lending.

S&P's words are sure to carry weight, since it is the largest issuer of credit ratings for mortgage loans. Mortgage banks need a positive rating before they sell their nonconforming loans into the secondary market, an approach almost all prefer to keeping the loans on their books.

Right now, the market for B and C loans is believed to be below $50 billion annually. That market could grow, with the right impetus, to $70 billion within the next couple of years, said Regina J. Reed, senior manager of the national mortgage finance group of KPMG Peat Marwick. …

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