Not long ago, lenders laughed at people who wanted a mortgage but had blemishes on their credit records. Those customers had to turn to so-called "subprime" companies, lenders who charged more and could name their terms because people didn't have another option.

Now, however, the line between the two industries has blurred because mainstream banks, insurance companies and other providers of financial services have bought up several of their subprime stepchildren.

This shift, experts say, means borrowers with less-than-stellar credit can get mortgages and equity loans more cheaply and easily today than they could have in the past.

"Before, it was 'yes' or 'no.' Now it's almost always that we can make you a loan," says Mark Riedy, head of the Real Estate Institute at the University of San Diego. "It's just not one bank acquiring a subprime lender; this is becoming the thing to do. The 'B'-quality borrower of today, you're going to end up giving 'A'-quality rates to."

The term "subprime" refers to borrowers who, for one reason or another, don't qualify for "conventional" bank mortgages or home equity loans. Lenders rank subprime customers on a sliding scale, from "A-minus" on down to "D" or lower, and they adjust their rates and loan terms accordingly.

"Lenders are interested in, 'What's my net return?' says Philip Jackson Jr., a banking professor at Birmingham-Southern College in Birmingham, Ala. They say, "Those people's probability of repayment is this, so therefore we'll charge this interest rate and after we deduct our losses, we'll still make our money."

Banks snap up subprime firms
While subprime lenders have been around for years, traditional banks have only recently been willing to swim in their waters. During the past few years, they began buying subprime companies or founding their own in-house subprime lending divisions.

Among the recent transactions: Cleveland-based KeyCorp., a regional bank, acquired Champion Mortgage Co. for $200 million in Sept. 1997. First Union Corp., the Charlotte, N.C.-based bank, bought The Money Store for $2.1 billion in June 1998. And Conseco Inc., the Carmel, Ind.-based insurance company, paid $6 billion for Green Tree Financial Corp. that same month.

These deals were good news for shareholders right away, but it took a while for the impact to filter down to the retail level. Now that the dust has settled, some of the major banks that bought into the market have set up programs that refer declined borrowers to subprime lending affiliates. In other cases, people can find products available no matter whose office they visit. Either way, experts say the net effect is lower rates and one-stop shopping.

Borrowers who fall into the subprime category might benefit by going to lenders that are part of larger organizations. As the bigger companies expand their expertise with computerized credit scoring, risk management and other procedures to their new affiliates, they may be able to offer better terms than companies going it alone.

Lines blur between lenders
"When it comes to home-equity products, if you walk into a bank branch or you walk into a Money Store branch, we have exactly the same products at the same rates to the customer," says Steven Friebert, head of production for the Money Store's mortgage division. "If you call 1-800-LOAN-YES or the 800 line to First Union, that's the general situation."

He adds that people who go to First Union and don't qualify for a conforming "A" loan now can be handed off to a special centralized processing unit that Money Store officials helped the company develop for "B" and "C" credit borrowers. They are told the subprime option is available, and if they decide to continue, they still deal with the same branch officer throughout the lending procedure, Friebert says.

Customers of either arm of the company can get subprime home equity loans as well as "cash-out refinance" loans, he adds. With the latter, a borrower increases the size of a first mortgage and takes out the difference between the new and the old balance in cash.

More choices for borrowers
At Key, too, the subprime focus is on home equity lending and refinancing rather than home buying, according to Jim Downing, president of the company's Key Finance division. He says the company began referring customers who didn't qualify for bank equity loans to Champion in the second half of 1998, resulting in about $1.5 million worth of loans a month during the past half year.

"It just simply makes sense to supplement or complement our existing home equity presence with a non-prime capability and to round that out with one additional home equity source," Downing says.

The financial market turmoil of last fall temporarily stymied the banks' move toward subprime lending. Indeed, some subprime companies ended up filing for bankruptcy or firing workers because they couldn't raise money to run their businesses. But as relative calm has returned, experts see interest rates and loan terms continuing to improve this year for borrowers in a bind.

"I think that's a growing trend, and I think if you add the Internet and electronic commerce capability to that, then you will see the conventional, conforming mortgage banks who have the scale and technology to move rapidly into the subprime market," Downing says.

-- Posted: March 11, 1999