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Thursday, Mar 28, 2024

LENDING — Sub-Prime Lender Banking on Move Into Cyberspace

Only a year ago, officials at WMC Mortgage Co. had envisioned a vast network of retail outlets to handle their lending business. Today, after a revolutionary change in WMC’s business model, clicks have replaced the bricks the company once intended to build. WMC now makes all of its loans over the Internet, using a proprietary technology it developed in-house. And it deals exclusively with mortgage brokers, rather than directly with borrowers. WMC’s business-to-business program is believed to be the only one of its kind for sub-prime lenders banks that lend to people with troubled credit histories and other problems. It has helped the Woodland Hills-based company slash in half the cost of supplying loans, and provided an important competitive edge. “Last month I got a loan approval back in five minutes,” said Jeff Dahlgren, president of Transcend Financial Corp., a Scottsdale, Ariz.-based home mortgage broker that has been working with WMC since the company went online about a year ago. “Their program is the best for transmitting data back and forth.” Limitations to the Web Other lenders have turned to the Internet to supplement their business, but few have gone online to the extent of WMC. That’s mainly because government regulations limit the kinds of transactions that can be conducted over the Internet, making it impossible to complete a mortgage loan without at least some face-to-face interaction. WMC avoids those limitations by working with mortgage brokers, who, in turn, interact with the actual borrowers. “Our industry really entered some tough times back in mid ’98,” said Scott McAfee, chief executive of WMC. “We decided back then it wasn’t going to be acceptable just to survive the tough times. So we invested very heavily in developing some unique technology.” WMC and other sub-prime lenders once found ample financing on Wall Street. They bundled and sold their loans to investors who were willing to pay handsomely for the high-yield packages. (Sub-prime loans charge interest rates averaging 2 to 5 percentage points above “A” quality loans because lenders run the risk that the loans may not be repaid.) But beginning around October 1998, severe losses in global financial markets dampened Wall Street’s enthusiasm for these high-risk investments. Many stopped buying the bundled loans altogether, and those who remained cut the prices they were willing to pay, squeezing profit margins for lenders. “When sources of funding became more expensive, a lot of these guys went out of business or they had to retool,” said Michael Sanchez, portfolio manager at Hotchkis & Wiley in L.A. Initially, WMC began building a retail channel in hopes of competing with much larger players like The Money Store. The company planned to install about 80 storefronts from which it would deal directly with borrowers. But to run a retail lending operation WMC had to brand its name, and the company estimated that would cost anywhere from $17 million to $70 million in marketing expenditures. “When they (consultants) started telling me how much I would have to spend on marketing to establish a brand name, I said, ‘This doesn’t make sense,'” said McAfee. “It doesn’t work to establish a brand name for a product people only use once every seven years.” Instead, WMC invested about $20 million to develop its Internet technology, a state-of-the-art system compatible with just about any computer system a broker might use. A WMC representative installs the software and shows the mortgage broker how to use it in less than a day. The broker can then use the company’s Web site for the entire transaction, and to check the status of the loan as it goes through the pipeline for approval. “It allows you to manage the process a lot better,” said Dahlgren. “You don’t have to call someone on the phone and wait for an answer.” Since the program went online in August, WMC has signed up 4,400 brokers and processed $1.5 billion in mortgage loan transactions, McAfee said. Getting by with less The company has also slashed its workforce from 800 to 200 employees, and is now able to operate from a 40,000-square-foot facility instead of the 120,000 square feet of space it once leased. “We’re able to do the same amount of business on one-fourth the staff,” McAfee said. In March, WMC began using its Web site exclusively for loan processing. WMC does have online competitors. Full Spectrum Lending Inc., the sub-prime lending division of Countrywide Credit Industries, in May launched a Web site that lets customers research and apply for a loan online. The company expects the site to help generate traffic and save some time and money, because customers can research loan guidelines, rates and even file an application without “live help.” “A lot of research studies have shown sub-prime customers appreciate anonymity and like to find out what they can afford before speaking to people,” said Paul Abbamonto, president of Full Spectrum Lending. “At the moment, it creates some efficiencies.” But while sites like the one Full Spectrum and WMC employ can save some time and manpower, they can’t actually be used to conduct the transaction online because government regulations require “live” signatures on disclosures and other lending documents. “It’s still a very paper-intensive process, and the Internet doesn’t lend itself to that,” Abbamonto said. “Clicks and bricks seem to be the way to go.” Large companies like Full Spectrum have better access to capital and can afford to build their business base through the Internet while using traditional methods to complete the loan transactions. But for smaller operations like WMC, the name of the game is not writing more loans, it’s making more profit on the loans they do write. Under the old system, it cost WMC an average of 4 points to write a loan, or about $4,000 for a $100,000 mortgage. Through the Internet, the cost of providing the same loan drops to $2,000. At the same time, mortgage brokers are more likely to funnel business to the WMC site, provided their customers meet the company’s lending criteria, because the Web site saves them time and money. “(WMC is) most likely to get the business because I can most easily get an answer (from it),” said Dahlgren.

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