Not all borrowers have squeaky-clean credit histories, which is why lenders like Accredited Home Lenders exist and are doing land office business.
The San Diego mortgage banker specializes in home loans to borrowers who don’t meet the qualifying criteria for a traditional conventional home loans. Such borrowers may have a blemish on their credit history, do not have the 20 percent minimum down payment, or fail to meet some other standard that neatly fits the best mortgage loans, which are bundled with similar loans and then securitized by federal agencies.
While the loans are generally referred to as “subprime,” Accredited Home Lenders’ CEO Jim Konrath likes to call it “non-prime.”
Whatever it’s called, there are a whole lot of people who fall into the category who are buying homes and paying those loans off.
“Ours is a business that’s much more of an art than a science,” Konrath said.
With more traditional lenders, the decision almost comes down to a simple formula, Konrath said. Borrowers who meet the requirements get the loan; those that don’t are refused.
“When you don’t meet the requirements that’s where we’ll step in. Now it’s what should this deal look like, how does it make sense for them and for us.”
– Goal to Make Loans That Get Paid Back
That usually means the interest charged for the money will be a bit higher than that provided to the prime-A quality borrowers. But subprime lending isn’t making loans to impoverished borrowers at usurious rates with the goal of foreclosing on property put up as collateral, Konrath said.
“We are not in the business of defaults,” he said. “We want to make loans to customers who can and will pay us back.”
Looking at Accredited Home Lending’s history, its founders apparently are making mostly right lending decisions. This year, the 11-year-old firm will likely make more than $2 billion in loans, and through the end of September, nonperforming loans, or those that are more than 30 days delinquent, were at 5.1 percent.
According to Mortgage Information Corp., a San Francisco-based research firm, national rates for seriously delinquent home loans to subprime borrowers have been steadily rising and stood at 6.89 percent at the end of August. Seriously delinquent loans are those which have missed three monthly payments.
The vast majority of nonperforming loans won’t go into foreclosure because Accredited is aggressive about identifying problem credits and working with borrowers to figure out what they can do to help them get back on track, Konrath said. In most worst-case scenarios, the home is sold well before foreclosure occurs.
To minimize the company’s exposure, Accredited sells most of the loans it makes to much larger mortgage lenders. Last year Accredited originated $1.5 billion in home loans and sold off about $1 billion to other investors. The firm services or collects payments on the remaining $500,000 in loans.
The bulk of Accredited’s revenues come from the sale of loans to other lenders. Last year it gained $54 million on the sale of about $1.5 billion in loans, up from $36 million on the sale of $1.1 billion in loans originated in 1999.
Together with servicing fees, Accredited had total revenues last year of $57.2 million, up from about $40 million in the previous year. After all its expenses were deducted, Accredited’s net income was $6 million in 2000, compared to net earnings of $3.4 million in 1999.
– Rapid Growth
Accredited Home Lending’s rapid growth in recent years was recognized by both Inc. Magazine and the San Diego Business Journal. Over the past three years, Accredited revenues jumped 217 percent, ranking it in the 13th place on the Business Journal’s list of fast-growing private companies.
From 1995 to 1999, Accredited’s revenue growth shot up from $5 million to $39.8 million, or 663 percent, ranking it No. 402 on Inc.’s 500 fastest-growing companies for that time period.
Konrath realizes as Accredited gets larger, this type of revenue growth isn’t possible anymore, but he expects loan volume to continue rising at an annual pace of 25 percent.
Accredited was launched in 1990, at a time when the nation’s savings and loan crisis was raging, and commercial banks were merging and being acquired.
Founders Konrath and Ray McKewon realized as banks and S & Ls; cut back on their lending to deal with an escalating number of problem loans, they were abandoning a lucrative market that needed credit.
The two were veterans of the financial services industry but weren’t directly involved in mortgage lending. Konrath was president of Security Pacific Financial Services, a subsidiary of Security Pacific Corp., which was acquired by Bank of America.
McKewon was the president of his own venture capital firm, and helped co-found and finance several regional companies that went public or were acquired by larger corporations. Among the more successful was Immunetech Pharmaceuticals, which became Dura Pharmaceuticals, and Souplantation, which both went public.
The two founders developed a business plan to make non-traditional home loans and opened a 900-square-foot office in a Rancho Bernardo strip mall above a car repair shop.
Their expectations were simple and lofty.
“Our plan was to start a mortgage company designed someday, somehow to go to Wall Street, raise money and be a large company,” McKewon said.
– Creative Financing
In the early years, Accredited founders were the main sources of funding for the loans.
“We were loaning all our own money, putting up the funds one day, and selling the loan the next in order to have more money to lend,” McKewon said.
By early 1994, the company signed an agreement with Aames Home Loan of Los Angeles, a buyer of many of its loans, which included a credit line of $2.5 million. That line gave Accredited some breathing room and helped fuel an expansion of offices into Northern California and the Northwest.
Later that same year, Accredited was able to attract $5 million in venture capital financing from Crosspoint Venture Partners and Enterprise Partners. The investment capital allowed the firm to expand its offices and double its loan production. “We got out of our VW and climbed into a Chevy Impala in 1995 and drove that car until 1997, and then we upgraded to a Mercedes,” McKewon said, referring to obtaining even more lines of credit, and expanding to more offices. The expansion pushed the loan originations to $300 million.
In tandem with the loan production, Accredited boosted its employment from about 50 in 1995 to 833 today, including 270 at its San Diego headquarters. It operates six full-service offices in Atlanta, Bethesda, Md., Chicago, Cincinnati, San Diego and Warwick, R.I. It also operates 14 retail offices in five states where it makes direct mortgage loans to borrowers.
While many large commercial banks are now getting out of the business of subprime lending as a way of limiting their losses, Konrath says Accredited Home Lending should continue growing, even in a down economy.
Mortgage rates are at 40-year lows, and the company should improve its lending in certain new markets, he said.
The slowing economy will certainly increase the number of problem loans, but Konrath isn’t too worried.
“While we’re concerned about delinquencies, it’s a small enough piece of our business that it wouldn’t bring it all down,” he said.
