Sources:40 mortgage executives and senior loan officers with leading independent subprime mortgage brokerages representing more than $3.1 billion in 2004 subprime loan originations

Geography Sources are located across the United States, with 14 on the West Coast, 8 in the West, 6 in the Southwest, 4 in the Midwest, 3 in the South, 2 each in Middle and South Atlantic states, and 1 in the New England.

Interviews: Early September

Averages: Weighted according to each source's 2004 total loan originations

Research Objective: Assess U.S. subprime lending market to understand how lenders are reacting to increased competition

Background: Frontside Bank Notes' June Research found the subprime mortgage business is getting more competitive, forcing lenders to take on more risk and lower margins to maintain market share.

Key Quote

"Lenders are allowing more delinquencies on credit reports. Their restrictions are getting looser. I can now get someone a loan 30 days after they've filed for a bankruptcy."
  – Loan officer with a brokerage based in the South

Key Data

Lenders Ease Requirements, Push New Products
Loosening of lending requirements and a proliferation of new loan products — the biggest changes to hit the subprime mortgage market — are spurring demand. Almost two-thirds of sources said lenders are easing their standards, loan-to-value ratios are rising, FICO scores are being lowered and more banks are making exceptions on suspect loans. "Lenders are allowing more delinquencies on credit reports. Their restrictions are getting looser. I can now get someone a loan 30 days after they've filed for a bankruptcy," said a loan officer with a brokerage based in the South.

Brokers also are very optimistic and pushing new loan options that lower monthly payments for potential homeowners. "Interest-only loans and 40-year mortgages are where most of the business is going. People are taking the credit-card approach to buying a home, trying to only pay the minimum interest payment required every month," said a broker based in the Northwest. These subprime loan products incur more principal risk by allowing interest-only payments. Eight brokers said the increased use of interest-only and option ARM loans were the biggest change in the subprime market during 3Q05. "Lenders are adding interest-only programs as well as pay-option ARMs. They've also dropped some seasoning issues for refinancing properties. A lot of them used to require 12 months before refinancing, but now they're going down to six months," said a broker in Las Vegas. Eight other sources cited the introduction of 40-year amortization loans as the most important recent development in the industry. These loans further spread out the repayment of interest, lowering the monthly cost of a mortgage and allowing prospective homeowners to afford more expensive properties. "A lot of banks have rolled out loans with 40-year terms because it's so hard for people in California to afford homes," said one senior loan officer in Southern California.

Solid Growth for Subprime Originations
Subprime brokers reported solid growth in mortgage originations during 3Q05. "Our originations are up a lot this quarter. However, we are at a point during the tail end of a boom in housing and the mortgage business where we tend to see a lot more subprime borrowers. People figure they should get in now," said a manager of a large brokerage in the Northwest. Overall, sources expect their mortgage originations to be up 2% to 7% qq because of continued low interest rates, customers needing to refinance expiring short-term ARM loans, and a growing number of prospective subprime customers. Many of these customers recently have gone through bankruptcies, credit counseling or are immigrants from Mexico, sources said. A manager of a large Phoenix-based brokerage said, "This is huge for subprime lending. There are many retirees moving here with limited income. However, the even bigger advantage to our business is the endless supply of Mexican immigrants and other borrowers who cannot document their income with W2s and need home loans." Several sources also reported a boost in their business from "prime quality" home buyers choosing to apply for subprime loans because of the easier requirements and faster turnaround time. "There are more subprime borrowers than A-paper [prime] borrowers right now. It's also easier to qualify for subprime, so people are going that route even if they could try for an A-paper loan," said one source.

Originations during 3Q05 are expected to increase an average 8% to 13% yy. "The subprime market continues to be strong in 2005 — both home purchases and refinances," said a senior executive with a brokerage in North Carolina. Sources attributed the yy growth to more lenient lending standards and an increase of their marketing services.

New Century Eases Standards, Cuts Rates and Fees
New Century Financial Corp. is the most aggressive lender, according to sources, as it has eased its credit standards the most during 3Q05. "New Century along with Impac Mortgage [Holdings Inc.] are changing their programs to make it easier for people to qualify for subprime loans. They are increasing loan-to-value amounts, lowering FICO score requirements — even reducing the amount of time since a bankruptcy that they require," said one source.

Along with easing lending requirements, New Century is making concessions with interest rates and lender fees to meet its 3Q05 origination goals. "New Century is very aggressive with rates and their willingness to cut lender fees. Most other banks are doing the opposite and raising fees," said a mortgage executive with one of the largest U.S. subprime brokerages. New Century topped brokers' lists of lenders that have been the most willing to cut interest rates and fees to earn business during 3Q05.

First Franklin, New Century Preferred Lenders
National City Corp.'s First Franklin subprime mortgage unit and New Century Financial were mentioned most by sources as one of their top subprime lenders. "First Franklin is my No. 1 subprime lender because of ease of use, and they have great rates," said one. "Their automated system is also really easy to use. Accredited Home Lenders [Holding Co.] is also one of my preferred lenders. I see their representatives a lot. They are very proactive." First Franklin, a preferred lender for 12 sources, also received high grades for broker service and a strong group of underwriters with consistent guidelines. New Century was a top lender for 11 sources, fueled by the bank's strong account representatives, low rates and broker incentives.

Subprime Pure-Play Banks Take Different Routes
Fremont General Corp.'s Fremont Investment & Loan is taking big steps to ease its lending requirements, while Accredited Home Lenders is staying the course. Fremont was cited most often by sources when asked to identify lenders lowering FICO scores and raising loan-to-value levels. "We turn to Fremont for the very poorly qualified homebuyers," said a principal with a large Denver-based brokerage. Impac Mortgage also was named by sources as a lender relaxing requirements. Fremont is a top lender for six sources, while three said Impac is one of their top three lenders.

Accredited Home Lenders is taking a different approach to generating business. The bank is relying more on building relationships with their brokers than cutting loan requirements or fees. According to sources, the bank is one of the few not making any significant changes to its lending practices. Sources did not name Accredited as a lender lowering FICO requirements or allowing higher loan-to-value ratios. In addition, the bank was not one of the lenders making concessions with fees, interest rates or increasing broker incentives.

Wamu, National City Lead Big Mortgage Banks
Of mortgage-based banks participating in subprime lending, Washington Mutual Inc.'s (Wamu) Long Beach Mortgage and National City's First Franklin are the leading lenders. Sources listed Wamu's Long Beach unit as one of the top subprime lenders for easing lending standards, specifically for lowering FICO score requirements and allowing higher loan-to-value ratios on their subprime loans. First Franklin is taking a different approach to increasing loan originations. It was the second most recognized bank (behind New Century) for cutting interest rates and lenders fees to generate business. "First Franklin has loosened credit for purchase loans and become more aggressive pricing-wise," said a manager of a large Western brokerage. First Franklin is one of the most widely recognized banks among sources for increasing broker incentives or kickbacks during 3Q05.

Countrywide Tightens Credit, Increases Promos
Countrywide Financial Corp. is tightening credit requirements, according to sources, while New Century was at the top of the list of lenders continuing to ease their lending requirements. "Almost all of them are dropping their FICO score requirements and increasing their loan-to-value ratios," said a subprime brokerage owner. Countrywide and H&R Block Inc.'s Option One subprime mortgage unit were named most often as lenders tightening standards, followed closely by Accredited Home Lenders. Countrywide is raising FICO score requirements on many of their popular loan programs, including interest-only loans, a move that might be hurting business as it was the only lender said to be making this move, according to sources. "Countrywide has increased their prices and has become more stringent in their requirements. As a result, I expect to do less business with them going forward," said a Southern California broker.

Despite the more conservative lending approach, Countrywide is attracting business through more broker incentives and kickbacks. Countrywide and National City's First Franklin are the two most widely recognized banks for increasing broker incentives during the last three months. "Countrywide will work incentive deals with you if you dangle loans in front of them, which ultimately hurts their margins," said an owner of a large West Coast subprime broker.

Additional Quotes

On the Subprime Market ...
"The market has softened up. We can do a lot more loans because of the economy. A lot of people are going interest-only, and lenders have relaxed their requirements."

"Interest rates have gone up a bit, but everyone is still competitive. There's leniency toward individual needs, with more leniency toward credit scores. I can get someone 100% financing on an investment property with a 580 FICO."

"Lenders are getting tighter with their requirements. They don't seem to be as freewheeling. They seem to see a risk that home values could go down from here."

"Continued increases in competition -- new outfits coming into subprime. Large banks getting more involved, cutting margins. Prime brokerages trying to get into the market."

"Lenders have dropped the credit scores they require for 100% loans. Forty-year loans are also becoming big."

"Interest rates will go up, but that won't affect subprime too much. Every time I've seen an interest rate increase, people get scared and wait to see if the rates go back down. Then in 45 to 60 days, they accept the new rates and it's business as usual."

"There will be a shift from lower-tier stuff to better loans as foreclosure rates and interest rates go up. That will hit the subprime market first -- they're the most likely to walk away from a house. Job loss is also more likely to affect the subprime group."

On Growth in Originations ...
"There seem to be less subprime clients who are willing to come forward. High house prices are wiping out that niche."

"Consumer credit counseling has caused many people to wind up in subprime because the banks treat it as a bankruptcy. They get in a little over their heads and think it's a fix for their problems, but they don't know what it will do to their credit. Also, I think the industry is out of money. Many people have purchased or refinanced since 2000 at historically low rates, and they're not giving it back. So the banks have started pushing, for example, five-year ARMs at 4.5%, knowing that people will have to refi at a higher rate in five years. I see this kind of stuff two to three times a day."

"Our business is down. We are losing customers to the lenders' storefronts, like Ameriquest [Mortgage Co.] and Countrywide."

"When rates for A-paper loans go up, we wind up turning to subprime for jumbo loans. Since subprime rates lag prime rates, they can be cheaper when prime rates rise."

"Our business is flat this year. 2004 was a big year -- the phones were ringing off the hook."

"In October, the credit card companies will double the minimum payments they require, which will cause more people to have trouble qualifying for a loan. It will hurt their debt-to-income ratio."

On Lending Requirements ...
"There's such a variety of niches in subprime. Everyone is going interest-only, it seems like, and there are more and more option ARMs available. The big banks are also trying to get into the subprime market."

"Countrywide has increased their prices and has become more stringent in their requirements."

"They're all getting more aggressive, especially with interest-only and 40-year loans. Option One will soon add negative amortization, which is a first for subprime."

"Option One has raised rates. They say their margins are too low. The others, like New Century, are still scrambling for business by lowering rates and FICOs."

"All of my primary banks have lowered their FICO score requirements or will pay an incentive in the form of rebate pricing."

On Banks Lowering Rates and Fees ...
"New Century is very aggressive with rates. We usually do not go with them because we have better relationships with other banks. Countrywide is also giving volume discounts."

"Option One lowered its rates on some programs, particularly jumbo loans."


1. What have been the biggest changes in the subprime market during 3Q05?
(Some sources gave more than one answer.)

2. Did your 3Q05 subprime mortgage origination volume increase, decrease or remain the same qq and yy?

3.Which subprime lenders are your top providers?
(Some sources gave more than one answer while others did not respond.)

4. Did subprime lenders increase, decrease or keep the same their lending requirements during 3Q05?

5a. Which lenders eased or tightened overall lending requirements during 3Q05?
(Some sources gave more than one answer while others did not respond.)

5b. Which lenders changed the credit score requirements during 3Q05?
(Some sources gave more than one answer.)

5c. Which lenders are accepting higher loan-to-value ratios during 3Q05?
(Some sources gave more than one answer.)

5e. Which lenders have been the most willing to cut fees to win business during 3Q05?
(Some sources gave more than one answer.)

5f. Which lenders have offered additional broker incentives during 3Q05?
(Some sources gave more than one answer.)

Low Interest Rates and Real Estate Driving Wells' Commercial Business
Continued low interest rates, real estate related loans and a growing economy are generally driving the demand for Wells Fargo's commercial lending business. "Our market has been very hot for the last few years. Population growth has fueled residential construction, and there has been a lot of demand for capital," said a Western vice president of commercial lending with Wells Fargo.

Approximately one-third of sources said commercial real estate related loans were the primary driver of their lending business. "Other than real estate related loans, we are not seeing a lot of commercial improvement. We're seeing companies buy or build new buildings or expand their current locations, but we are not seeing much in the way of companies buying a new fleet of trucks or other capital equipment," said a senior vice president of business lending. Another one-third believes low interest rates are the primary force behind demand, and several sources credited an improving economy.

Solid Q3 Commercial Lending Growth But Below Q2
Wells Fargo's commercial bankers are reporting solid 3Q growth in commercial loans and real estate but below the bank's 2Q yy results. "Historically low interest rates are helping to fuel demand, but we're not seeing significant improvement over last year," said a regional bank president. Overall, sources expect their Q3 commercial lending volume to be up an average 7% to 12% yy, below the average 13% yy commercial and real estate loan growth Wells Fargo posted in Q2. The few sources who reported low or a decline in lending blamed increased competition and the willingness of smaller community-based banks and S&Ls to offer lower rates and easier credit standards. "The local banks are offering lower rates and easing credit standards. These banks are stretching themselves on deals they wouldn't normally get involved in," said one source.

Sources overall were slightly more optimistic about their lending prospects for the remainder of the year. "We have a couple really big land deals poised to come in by the end of this year," said a Northeastern vice president of business lending. Sources expect their business lending for all of 2005 to be up an average 9% to 14% yy, fueled by an improving economy, real estate/construction growth and Wells Fargo's greater emphasis on its commercial lending unit. "Wells is putting more and more people on the street. The group I am in has doubled in size over the last six months," said one loan officer on the West Coast. Another source who was formerly a Wells Fargo mortgage officer said the bank is deliberately moving employees from its mortgage operations to business lending.  

Slight Drop in Loan Spreads, Maintaining Credit Standards
During the last three months, Wells Fargo business lenders have experienced a slight drop in their business loan spreads but have not moved to lower credit standards. "Competition is getting tighter and tighter, but spreads haven't changed in the last three months. We pretty much offer the lowest pricing from the start. In the past we've left a little room to negotiate with, but things are too competitive right now," said one California-based source.

Four of the 18 sources reported decreasing spreads, two bankers are growing their margins and the remaining is unchanged. Stiff competition as well as the Federal Reserve raising interest rates are the main pressures on loan margins. "Spreads have gotten a little thinner as the Fed began to increase interest rates over a year ago, but not much change in the last three months. The industry as a whole has become more competitive," said one loan officer.

Unlike many other lenders, Wells Fargo is not lowering credit standards to generate more business. "We haven't eased at all. Underwriting has even become slightly more stringent because of housing bubble fears," said one California-based source. Fifteen sources said the bank maintained the same credit standards during the past three months. "Our lending requirements are the same or maybe even a little tighter than usual. Wells is the only AAA rated bank, and we never waiver on credit standards," said a senior vice president of commercial lending.

Regional Banks, S&Ls Winning Business with Lower Rates and Lending Standards
Regional banks, credit unions and S&Ls are winning business from Wells Fargo and other banks by offering lower rates, easing credit standards and offering quicker loan processing turnaround time. These institutions also are getting into commercial real estate in an effort to capitalize on growing demand for commercial property. "The credit unions are delving into commercial real estate more and more and are treating the deals with the same kind of inflated loan-to-values you see with residential deals. They're a lot looser than we would be on a similar loan. Community banks are competing on price," said one source. Citigroup Inc. (NYSE: C) and Bank of America Corp. (NYSE: BAC) were the only large, national banks mentioned by Wells' bankers as lowering interest rates or lending requirements.

Although Wells Fargo has very competitive loan rates, the bank primarily competes with a variety of product offerings, 20-year fixed loans, superior online business banking and strong relationships with its clients. "Only one or two other banks in the area offer the kind of long-term 20-year financing we offer. We also have an advantage over some banks when it comes to hedges, swaps, derivatives and other more complicated financial products," said one business banker. The bank also is gaining business with "business equity loans", similar to retail home equity loans. "We're on the leading edge with a business equity product. Similar to a home equity line of credit, we allow businesses to tap into the equity they have built up in their buildings," claimed one source.

FRONTSIDE Sources

18 primary sources composed of one Wells Fargo bank president, six vice presidents of business lending and eleven commercial loan officers

Unique Findings

JPMorgan Chase's Blink card comprises 2.33% of its participating merchants' transactions. However, the smaller percentage most likely can be attributed to the program's more recent launch, averaging three months ago.

Merchants Agree New Cards Will Save Time and Money Handling Cash
While most merchant sources have yet to see immediate results, sources agree the new systems ultimately will save them and customers time during transactions and cut the merchant's cash handling costs. "As these cards become more prevalent, it will make our cashiers happy with the faster transactions and make our managers happy with less change and dollar bills we have to pay to have lugged to the bank," said a manager with a large Denver-based convenience store.

Eleven of the 20 merchants expect contactless cards to save time and money, decreasing the cost of handling cash. Most of the advantage comes from the replacement of cash and PIN debit transactions. "The card is faster than cash and debit cards, and I would prefer to not deal with cash at all," said one source. Four sources do not believe the new cards will save time and money used to handle cash, while the remaining sources were either mixed or unsure of the card's full benefits.

Sources are mixed about whether the new card systems currently are saving time in customer transactions. Retailers reporting time savings are seeing significant gains. "We are seeing a 43% savings in transaction time with the contactless cards and are hoping for a 78% improvement once people better understand the system, which can really help in peak mealtime hours," said a general manager with a large fast-food retailer. Those merchants not experiencing faster transaction times mostly pointed to customers' inexperience with the system and the time taken to learn the new process. "It takes about the same amount of time as cash or other cards at this point because we have to explain the process. It could really save time down the line if the system takes off," said a store manager with a large national retailer.

Merchants More Actively Promoting Amex ExpressPay
Merchant sources are more actively promoting Amex's ExpressPay than JPMorgan Chase's Blink because of better marketing materials and support. "Amex provides stickers for on the door and register. The card company also supplies radio spots for our store's speaker system and in-store brochures for people who want information on the new contactless card system," said an Atlanta-based store manager with a Fortune 100 retailer. All Amex merchant sources currently are advertising and encouraging customers to use the ExpressPay system.

In contrast, three of 12 Blink merchant sources have chosen not to advertise or encourage customers to use the system despite its more recent launch. "We are not strongly encouraging the use of Blink. We have had signs up in the past, but not that many people use the contactless system even though they have cards," said a store manager currently accepting Chase's Blink system.

Sources Would Recommend Contactless Cards
to Other Merchants
Despite the additional fees (replacing cash transactions), 15 of 20 sources said they would recommend investing in a contactless card system, which costs around $200, to other merchants. "Yes, I would recommend purchasing a contactless card reader to other merchants. It's a great idea and has a lot of potential, but it needs more advertising to back the product and raise customer awareness," said one source. Only three sources would not recommend the system to other merchants, needing more time to evaluate its usefulness.

FRONTSIDE Sources

20 sources composed of 12 JPMorgan Chase Blink and 8 Amex ExpressPay participating merchants in Colorado, Arizona and Georgia.

Amex Maintaining Premium Discount Fees with Retailers

Amex Gaining Early Interest with Second-Tier Card Issuing Banks

Washington Mutual's Struggling Mortgage Business in Further Decline

Washington Mutual Losing Top Mortgage Producers to Countrywide, Wells

Sovereign's Two-Pronged Commercial Approach
By combining personalized branch-level service with standardized regional support, Sovereign lenders are realizing solid growth this summer in commercial activity. Most sources said 3Q05 lending pipelines remain steady or are increasing, with overall applications up an average 3% to 8% qq and 2% to 7% yy. "Sovereign does things a little traditionally for a large institution in that it operates like a series of small branches aided by regional representatives," said one of its lenders. The result is a strong "local focus," backed up by efficient economies of scale, which helps the bank successfully attract new customers and retain existing ones while effectively competing against other area lending institutions.

Nearly all sources expect these positive trends to continue through 4Q05. "Businesses will always need extra cash or a bigger line of credit," said a Sovereign business banker in Massachusetts . A Pennsylvania source said, "Even as rates go up, my loyal customers know I will get them the best deal."


Personal Relationships Building Business Traffic
Operating out of all but the tiniest of Sovereign branches, Sovereign's local Business Bankers are networking throughout their territories to keep themselves and their bank highly visible. They also meet regularly with Small Business Administration officials in the area and those who represent municipal and state programs that foster community development and job creation. "We are constantly out talking," said a Connecticut business banker. "Even if [the business people we meet] don't want to do anything at the moment, they will hopefully remember us when they do."

Branch representatives directly handle loan requests ranging from about $50,000 to as much as $250,000, while regional commercial lenders take on larger requests — up to $25 million for branches in perhaps five neighboring counties. All underwriting is done on a regional basis, as is the servicing of existing loans. Sources stressed, however, that the regional work is always meant to appear seamless to the customer.

All business loan sources said they were located in hotly contested environments, with regional institutions such as M&T Bank Corp., Citizens & Northern Corp. and Omega Financial Corp.'s Sun Bank vying with them for smaller loans, while national institutions such as Wells Fargo & Co., Citizen's Banking Corp., Bank of America Corp. and People's Bank were contending for larger transactions. However, most agreed Sovereign worked as hard or harder than the competition to pick up local business loan traffic. "We are the most aggressive in a very competitive market," said a Connecticut business banker.

Commercial Lenders Stress Rates, Options, Service
Almost all sources said Sovereign commercial lenders were as accommodating on terms as they needed to be to attract and retain customers. One said, "Ninety to 95% of the time I offer the best rates and options in town." (The lone exception, representing the smallest branch contacted, complained that Sovereign underwriters were stricter than some smaller competitors in her Pennsylvania town and she was accordingly losing business applicants to them.) Several sources also noted Sovereign was working to entice customers with innovative products, such as a recently introduced equity-loan program that permits business borrowers to utilize their personal homes as collateral, along with ongoing incentives like free business checking with no minimum balance.

In addition, sources said business clients like to deal with Sovereign because it responds quickly on applications — several noted the average turnaround time is one to one and a half weeks — and because closure rates generally are very high because local lenders understand the bank's underwriting requirements. "I prequalify almost everybody I talk to," said a community banking manager. "When I send in an application, it is almost always approved."

Mortgage Lending With a Responsive Approach
Unlike the way Sovereign handles commercial loans — with local representatives networking extensively in their communities in order to drum up new business and referrals — Sovereign tends to house as many as a dozen or more "mortgage specialists" in regional offices to handle home-loan requests from multiple branches. Also, unlike the business side, mortgage lenders said they typically are not the biggest or most aggressive players in their respective mortgage markets. However, by pursuing existing customers pleased with Sovereign services, offering competitive rates and options and providing personal connection points at conveniently located branches, all sources but one said 3Q05 mortgage loan volume increased qq and yy. (The lone exception said activity was down 3% yy because of tough comparisons.) Applications from independent mortgage brokers also helped drive volume. A Pennsylvania source said, "[Sovereign] is probably at the top of my list [because of] good service, good product and good pricing."

Mortgage applications — which were flat to up 5% on average for Sovereign during 3Q05 qq even as national statistics indicated July existing-home sales in the Northeast were declining — also have been partly spurred by some shifts in activity, according to sources. A mortgage adviser in New Jersey , who reported the largest qq increase among sources, said his 10% hike was the result of customers "jumping out of ARM product" when interest rates temporarily dipped. A Rhode Island source who reported a 3% qq boost said her customers were more interested this summer in refinancing than purchasing — a twist during this usually heavy home-sale season. Several said offering interest-only loans has been "a very successful competitive tactic."

Sources also said the most aggressive competition in their communities included some of the biggest regional and national names in the mortgage industry: Wells Fargo, Commerce Bancorp Inc.'s Commerce Bank, Countrywide Financial Corp.'s Countrywide Home Loans and Washington Mutual Inc.

Rates, Economy Not Yet a Concern
Sources overwhelmingly said the trend toward higher interest rates has not yet had any impact on either business or mortgage lending activity. Commercial customers need to secure loans when they need capital, several said, and cannot generally change their plans just because rates have risen — although they may shop around a little more carefully for the best deal.

Mortgage lenders said rates have only increased minimally or actually decreased during recent months, so borrowers know they still have access to historically low interest levels and are jumping on them. However, several sources said there is greater uncertainty for future mortgage loan demand. As interest rates rise and overall economic conditions worsen — such as inflation and the cost of oil, particularly as consumers face record gasoline prices and anticipate equal increases in home heating prices as winter approaches — mortgage activity could be affected.

National City Gaining Mortgage Share in Five Key States
National City Mortgage is performing well in its five highest production states. "They're certainly a very good source of mortgage loans and are benefiting from a particularly strong mortgage market in this area," said a director of a large Austin Texas-based brokerage. Sources are using National City for approximately 4% of their mortgage business, significantly higher than the bank's national market share of 2.37% as per American Banker.

As testament to the industry's fragmentation, around one-fourth of the sources still are just growing familiar with doing business with National City. "I think they're still pretty new to the area, but we have used the bank for home equity lines," said a Chicago-based broker. Bank of America Corp. (NYSE: BAC) and Wells Fargo & Co. (NYSE: WFC) received the most mentions among those banks doing more business with sources.

Moderate Origination Growth Projected in National City's Five Key States
Sources expect moderate growth in their 2005 mortgage business, expressing uncertainties about interest rates and business lost to homebuilders. "Over the past year it has fallen from previous years. I hope it won't continue. The business is pretty responsive to mortgage rates. When rates are up, people generally stop buying and refinancing. However, I expect my business to hold steady or possibly go up in 2005 because people are consolidating debt or refinancing," said Northern California-based broker. Sources estimate their overall mortgage business to be up an average 6% to 11% yy in 2005. This forecasted increase is much better than the 3% to 8% decline forecasted by FRONTSIDE sources in June's National City Rust Belt area interviews.

A few sources also said nationally based homebuilders and their corresponding financing companies are taking a bigger share of their lending business. "Our business is regional in nature, and it's cyclical. Right now should be prime activity in the summer months, when families move. However, that has not been the case. The reasons are that national builders have moved into the Austin area, and they're directing the flow of mortgages to their own mortgage companies. They're taking a good piece of the pie away from what was once there. We're also losing business to the Internet. There's the same number of originators but less of the pie to share," said a senor executive with a Texas-based broker.

National City's Loan Processing and Programs Considered Strong
National City's loan processing is above average compared with competing mortgage banks, according to eight sources. Only two rated the bank as average or below while the remaining sources were unsure. "Our future business with National City will be totally dependent on the bank's ability to provide the mix of loan products we need, provide competitive pricing, and provide competent service on the back end to deliver in a timely fashion. Those are the three ingredients that make a mortgage bank valuable," said one source. The bank earns good marks on communication with brokers, relationships with representatives and speed of processing.

One-half of sources rated National City's loan programs and interest rates as above average, while no source viewed its programs as below a typical mortgage bank. "I would consider National City's overall loan programs as fair for the homebuyers, good for brokers and competitive in the marketplace. They are not the best, but it's better than average," said an Illinois-based broker. Brokers are drawn to the bank because of its competitive rates, variety of loan programs and updates on changes to its loan offerings.

Brokers Generally Satisfied with First Franklin
Brokers involved in the subprime market generally were satisfied with National City's subprime subsidiary First Franklin Financial Corp. "We are very happy with First Franklin. We've been doing business with them for a long time. On the other hand, I don't know anyone who uses National City. When I talk to brokers at networking events, no one brings National City up, just First Franklin," said a Texas-based broker.

FRONTSIDE Sources

20 sources composed of owners, principals and senior brokers with large mortgage brokerage firms in National City's five key states of California, Texas, Virginia, Illinois and Maryland.

National City 's Mortgage and Commercial Lending Lagging in Weak Rust Belt

Top Subprime Mortgage Lenders in Western U.S. Easing Policies to Fuel Demand

Services Levels in Further Decline
Over the last six months, WaMu has changed much of its mortgage division's senior management team. So far, according to our sources, these changes are not translating into improvements to sales and processing support for independent mortgage brokers. "We know they have brought on some big mortgage executives ... to shore up the leaks over there, but I'm just not sure if it is working," said one managing partner of a large Northern California-based brokerage.

Six of 17 responding independent brokers reported a decline in WaMu's service and sales support over the last four months, while only one source noted an improvement. "I don't know what has caused their quality to drop so fast, but they are hands down the worst bank I've dealt with. Washington Mutual cost my company $14,000 so far this year on two loans that failed to go through. It doesn't matter if their prices are better or if they'll take borrowers we can't place through other banks, because they don't follow through on their loan processing," said a Florida-based broker. Complaints include slow turnaround time, significant cuts in processing support staff and trouble submitting loans through WaMu's online system. "I've had problems submitting loans through them electronically. I would fill out the information and it would constantly give me errors. I don't have that problem with Wells Fargo [& Co. (NYSE: WFC)] or Countrywide," said one broker.

Of the 10 sources that cited no change in service and support levels, three said the service level was poor to begin with. "Our biggest issue with them has always been turnaround time. Getting a loan approved and receiving the closing package always seems to come down to the last minute. I wind up worried that the loan won't happen. I'm usually forced to call their operations guy, who I know personally, to make sure the loan goes through. I don't have to do that with other banks," one said. The three sources offering no response arguably represent WaMu's bigger challenge because they said they had stopped doing business with the bank within the last year because of poor service or bad experiences.

Personnel Turnover Continues
In March 2005, FRONTSIDE reported Washington Mutual as losing several top mortgage producers, a trend the bank still is struggling to reverse. Seven of 17 responding sources recently experienced turnover in their WaMu support and/or sales representatives. "They seem to be constantly understaffed," said the president of a large Massachusetts brokerage. "Our company lost its regular Washington Mutual sales representative earlier in the year. The person who replaced that employee left soon after that, ushering in a third sales representative in the span of just a few months." This continued personnel turnover is directly contributing to the service issues frustrating some independent brokers. The principal of a Denver brokerage noted a service decline simply related to "working with new processing people."

Declining Share of Broker Business
The 20 broker sources currently rely on WaMu and its Long Beach subprime unit to fund approximately 7% of their mortgage originations, a decline over the last four months. "We are doing less with them compared to four months ago. Their programs are not unique, and the ones that were unique have now been duplicated by other lenders," said an owner of a large subprime brokerage. Several brokers said they only use Washington Mutual for specific reasons, such as subprime loans through Long Beach or five-year fixed loans for properties in the $1 to $2.5 million range. Seven sources reported a decline in WaMu's share of their business over the last four months while only one source cited an increase. "I'm finding more and more that there are very few times WaMu is the best option. If all things are equal, which happens quite often, I will go with Countrywide, GreenPoint Mortgage [subsidiary of North Folk Bancorporation Inc (NYSE: NFB)] or another lender," said one broker. Frustration with WaMu's service level was the most commonly cited reason for its decreasing share of business. "Mostly service-related issues keep me from doing more business with WaMu. Their points and interest rates are competitive but not good enough to overcome their service problems," said a principal of a large Northwest-based brokerage.

Brokers also reported limited effort by WaMu to lure back their business in the forms of new loan programs, more competitive rates or broker incentives. "There is not much change or innovation with this lender," said a large brokerage's owner.

Countrywide Gaining WaMu's Lost Business
Eight of 20 sources said Countrywide was earning more of the business that might have gone to Washington Mutual in the past. " Countrywide and Homecomings Financial [Network Inc., subsidiary of General Motors Corp. (NYSE: GM)] give me a quarter point because of the amount of volume I drive through them, so I use them instead of WaMu. I also use IndyMac [Bancorp Inc. (NYSE: NDE)]. Four other brokers preferred Wells Fargo over Washington Mutual.

Those who noted reasons for their preferences cited more competitive rates and better service. "They're notorious for not being proactive. They're very single-minded and unwilling to think outside the box. They'd rather let a $200,000 loan get away than work with us on a lock extension like other banks," said a Texas brokerage's vice president, echoing others' feelings toward WaMu's lack of innovation.

FRONTSIDE Sources

20 sources composed of senior executives or top brokers with U.S. mortgage brokerage companies.

Washington Mutual's Struggling Mortgage Business in Further Decline

Washington Mutual Losing Top Mortgage Producers to Countrywide, Wells

Top Subprime Mortgage Lenders in Western U.S. Easing Policies to Fuel Demand

• Houston, Denver Lead Mixed Commercial Real Estate Market: Houston and Denver are showing the strongest commercial real estate markets, while the other three major population areas in the central states are slightly below industry projections.
• Moderate Gains in Business Lending for 2005: Business bankers and corporate finance executives forecast an average 7% to 12% yy gain in business loan demand.
• Wells Fargo Preferred in High-Growth Regions: Wells Fargo is the preferred lender for sources in the higher-growth regions of Denver and Houston. Bank of America Corp. (NYSE: BAC) and U.S. Bancorp (NYSE: USB) also are considered leading commercial lenders.

24 sources located in U.S. Federal Districts 8, 10 and 11

Houston, Denver Lead Mixed Commercial Real Estate Market
Houston and Denver are showing the strongest commercial real estate markets in the Central U.S., while Dallas , Kansas City Metro and St. Louis are slightly below Real Estate Research Corp.'s annual projections. Overall, the 15 commercial real estate sources expect 2005 rental rates to be flat to up 5% yy. "The retail market is growing, the good locations are in high demand, but marginal locations are not leasing. Investment in commercial properties is the highest I've ever seen," said the owner of a Denver-based commercial real estate brokerage.

Two-thirds of the brokers in Denver and Houston said their commercial investment sbusiness was up significantly as more businesses try to capture equity gains in real estate. "Investment sales are the best market right now, followed by land sales, industrial leases and lastly office rentals. Local business owners want to own their property instead of leasing, which is fueling investment sales," said a large Houston-based brokerage's president.

Denver's rise in demand has been fueled by retail stores catering to new residential developments, while Houston has benefited from high oil prices and expanding petroleum businesses. The other regions have been helped by improving economies, population growth and expanding businesses' increased hiring.

Eight of the 15 commercial real estate brokers have experienced strong to very strong demand. "The industrial market is seeing a healthy velocity of leasing. It's still a tenants' market, but we're seeing strong absorption. The market is as good as it's been in four years," said a senior broker with one of the top three nationally based commercial real estate brokerages. Of the remaining sources, six expect moderate demand for commercial real estate while one forecasts lower demand for the near future. These more cautious brokers primarily were located in Kansas City and St. Louis , where C&I lending is just starting to accelerate.

Moderate Gains in Business Lending for 2005
Central U.S. commercial lending bankers and corporate finance executives expect moderate gains in Midwestern business loan demand, forecasting an average 7% to 12% increase for 2005. "We're growing and need financing to open new stores. Our other stores are doing well, and we're a relatively young company that's in a growth mode," said one finance executive.

Companies continue to enjoy relatively low interest rates and easy availability to capital. Four of the five responding bank-based business lenders reported low credit constraints for businesses seeking capital. The abundance of lending capital has lead to increased competitive measures for Central U.S. banks and their lending policies. "Our bank has become more aggressive and has been forced to change policies to do more lending. We've eased credit standards slightly, but more importantly we've increased our lending limits," said a commercial lending vice president for a regionally based Denver bank.

Wells Fargo Preferred in High-Growth Regions
Wells Fargo is the preferred lender for Denver and Houston sources. Bank of America and U.S. Bancorp also are considered leading Central U.S. commercial lenders. "We have a long-standing relationship with Wells Fargo and a few other small banks. Wells offers the most competitive rates. They do not necessarily offer any special programs, but they understand our business," said a large Denver-based retailer's vice president of finance. Overall, Bank of America, Wells and U.S. Bancorp dominate the central states' commercial lending market, according to sources. However, beyond these "Big 3," the market is very fragmented, with many smaller community banks that depend on local knowledge and relationships to win business.

UMB Financial was described as a strong player by St. Louis and Denver sources. Cullen/Frost Bank and Sterling Bancshares Inc. (NASDAQ: SBIB) also were noted among the most active regionally based community banks, primarily by Texas-based sources. "Sterling Bank specializes in small business loans and does a lot of advertising in our area," said a Houston-based business lender.

FRONTSIDE Sources

24 sources composed of 15 commercial real estate executives or brokers, 6 bank-based commercial lenders and 3 corporate-based finance executives.

Moderate Home Equity Growth Forecasted for 2005
Mortgage brokers are anticipating moderate gains in their 2005 home equity loan business tempered by rising interest rates. "Interest rates are going up, so fewer people are applying for home equity loans," said a large West Coast brokerage's president. On average, sources said their 2005 home equity business will increase 5% to 11% compared with a very strong 2004, showing this loan category's continued vitality. With interest rates still at low levels and home values high, several sources said their customers want to lock in rates now and make sure they have money available for home improvements and other projects. "House prices are so high that people would rather improve their homes than sell them," one source said.

JPMorgan Chase Preferred Home Equity Provider
JPMorgan Chase and Wells Fargo are receiving the vast majority of the sources' home equity business. Competitive rates, ease of paperwork and quick application turnaround time are among the reasons JPMorgan Chase has an advantage over its peers. The bank also is winning over clients with stated income loans, piggyback loans sold with home purchases and broker payout incentives even on its no-fee home equity lines of credit. One source said he had not offered home equity loans at all until he discovered Chase's no-fee equity line, which still pays the broker $700 to $800. "I wasn't doing home equity loans before this because there wasn't any money in it," the broker said. "I used to send people to their local banks." Despite being mentioned among the most used banks by only five of the 20 sources, National City Corp. (NYSE: NCC) was the most preferred lender for four of these sources. These satisfied brokers said their repeat business with the bank is due to quick turnaround times, no pre-payment penalties and helpful broker service. IndyMac Bancorp, Inc. (NYSE: NDE) was mentioned as the leading regional lender because of its strength in reverse mortgages and home equity lines tied to its credit cards.

Bank of America Most Aggressive with Marketing
Eleven sources reported examples of banks taking more aggressive marketing and promotion activities to win their home equity business. BofA received the most mentions, using a variety of methods such as faxes, e-mails, direct mail pieces and phone calls. "Bank of America has been aggressively soliciting business through its reps and rate sheets," said one California-based broker. Wells Fargo and Citibank also were cited. Citibank appears to be employing the same tactics as BofA, while Wells Fargo is emphasizing phone calls and direct mail efforts.

Nine sources reported no marked increase in marketing activity. "There seems to be less interest overall in home equity lines of credit because interest rates are up," said the president of a large Arizona-based brokerage.

Reverse Home Equity Loans Gain in Popularity
Brokers reported greater interest in and popularity for reverse home equity loans which pay senior citizens monthly installments, no-fee programs and home equity loans tied to credit cards. Reverse equity loans available for senior citizens through the Federal Housing Administration (FHA) have increased in number, according to three sources. One said, "We will see a 33% increase in such loans this year compared to last."

Two sources singled out Citibank's new stated-income products while two others pointed to Washington Mutual Inc.'s (NYSE: WM) no-fee equity line, which includes a fixed-rate second mortgage that consumers can draw against.

FRONTSIDE Sources

20 sources composed of senior brokers or executives with mortgage brokerage companies in the highly appreciated Western and Southwestern regions of the United States .

20 sources located in Arizona, California, Illinois, Florida, Oregon, Texas and Virginia

Speculators More Confident in Market, Increasing Investments
Speculator sources are very confident in their respective housing markets and are increasing dollars invested in real estate. This enthusiasm is banked largely on booming development, a brightening employment picture and a steady influx of new residents. "I'm more optimistic just because of the different indicators," said an Irvine, Calif.-based speculator. "There's job growth and developments popping up. It's an urban metropolis, and things look good. More people are still moving in than out."

Overall, nine sources are more confident in the real estate market than six months ago, nine others feel the same while only two are less confident. "I have around the same confidence in the market because home values are still trending skyward. Prices will flatten eventually. Right now I am just trying not to overextend and working on plans if the market does begin to fall," said an investor with 15 residential and commercial properties in the Miami area.

Speculators are acting on their enthusiasm by increasing their total investments in the housing market. "I'm investing slightly more now compared to the beginning of the year. I take out profits to live on, but I have more available capital because of the appreciation," said one source. Sources have increased their real estate investments an average 6% to 11% compared to six months ago.

A few speculators express frustration with having capital to invest but also difficulty finding promising investment properties because of an influx of new speculators. "It's been more difficult to get the good deals because the same people who were paying too much in the late 1990's stock market are now coming into the real estate market en masse. As an experienced investor, I'm actually looking forward to increased interest rates as well as changes in the law to eliminate lease options. My business isn't necessarily down, it's just that everything goes in cycles and I'm being more cautious, more picky. Inexperienced investors who paid too much and are now facing foreclosures are calling me these days," said one Dallas-based investor.

Keeping Money in Real Estate But Looking to Other Locations
Real estate speculators are showing no signs of leaving their vocation or pulling out investment dollars. "Nothing will get me to leave; I'm more of a value investor. Real estate is still about when you get a great deal on a property; it doesn't matter what the market is doing," said one Southern California source. Nineteen of 20 sources said they are in real estate to stay, claiming that investors can benefit from a range of market conditions. "When you're in real estate investing, good times are good and bad times are even better. When you're investing as opposed to just being a buyer, it's a different ball game than just buying and selling," said a Northern Californian investment group president. Sources report having an average of roughly 75% of their available real estate capital currently invested. Only one investor currently is reducing his exposure to real estate in favor of other investments (shifting to stocks because of fear of an overappreciated real estate market). The other 19 sources are broadly steadfast in looking for additional real estate investment opportunities, not for asset class diversification.

Investors are slightly less loyal when it comes to geography, with one-half of the sources either active in or considering markets other than their home base. Sources investing in outside locations are partial to Florida , Nevada and Texas because of available land and the presence of smaller, less competitive markets. "We are still based primarily in this area, but we are definitely looking at other locations. There are other areas out there that have possibilities, smaller markets where the numbers still make sense. They're away from the metro areas, the hot areas that everyone knows about," said a Northern Virginia/Washington, D.C., source.

Several sources say they likely would switch their concentration within the market during a correction. "A swift downturn in a particular segment" would cause one Central Texas-based investor to look at other real estate offerings. "We would not pull out entirely, we would just shift focus to another segment such as going from rehabs to buy-and-hold rentals or from residential and single-family homes to office space and storage facilities," this source said.

Strong Price Appreciation Projected in 2005
Speculators are anticipating strong appreciation in home prices again in 2005. Sources predicted an average 14% to 19% increase in 2005 home prices, with the largest gains forecasted in Florida and the Southwest. "It's stupid appreciation," an Arizona-based investor said. "It's been something like 6% each month." However, some sources said the market had begun to level off over the last two to three months. "Prices are not just going to go to the stars and the moon. Lenders are becoming more discerning. They will start pulling in as the market starts getting a little bit weaker. They'll get tight around their credit standards, their demands," said a San Diego-based investor who currently is not making any new investments.

Sources are mixed on flipping versus buying rental properties for ongoing income, with most involved in both strategies. "We flip houses without working on them [wholesale], and we fix and flip houses [retail]. We have 28 units of buy and hold, and we currently have five single family homes that are lease-optioned," said a investment group president in Texas .

Investors Turn More to Private Lenders
Speculators are doing more business with private lenders and investors in an effort to sidestep banks and their slower, more rigid lending processes. "Banks make real estate investing difficult. We do not have the time to wait," said the Central Texas-based investor, who also noted she prefers to use private lenders and home-equity loans to quickly purchase properties.

Banks are particularly unpopular when it comes to fix-and-flips. Most sources prefer to use private capital for these transactions. "Getting the best interest rates from a bank is not the biggest concern because we only hold properties for a limited period of time. It is the flexibility of programs and speed that are king," said one Florida-based source.

Private lenders, CountrywideFinancial Corp. (NYSE: CFC) and Washington Mutual Inc. (NYSE: WM) are identified as having gained share of the sources' mortgage business compared with six months ago. "Washington Mutual is gaining my business," said an Arizona-based investor. "They have very solid loans, solid interest rates. They don't sell their paper. They also offer the four-option ARM, which is just a wonderful tool."

FRONTSIDE Sources

20 sources composed of career-based real estate speculators located in high demand housing markets.