Following a nearly one-year hiatus, Aames Investment Corp. will resume selling the majority of its mortgage originations to the secondary whole-loan market. The Los Angeles-based subprime mortgage lender last November reorganized under a REIT platform - a shift which required the accumulation of its now $4.2 billion investment portfolio in order to achieve its desired leverage.

"We are now selling the majority of production into the whole loan market," said Aames Chairman and CEO Jay Meyerson during the company's third quarter earnings call last week. Aames sold 55% of its production in the third quarter, Meyerson said, and he anticipates the sale of 70% to 80% of originations going forward. Aames sold $5.9 billion and $5.3 billion in 2004 and 2003, respectively, compared with about $1.6 billion as of the end of the third quarter.

Aames is among a group of subprime lenders including New Century Financial Corp. and Saxon Mortgage Co. that chose in recent years to convert to a REIT structure. The companies, which run their mortgage origination businesses as taxable subsidiaries, must hit the perfect formula in order to ensure that the subsidiaries don't exceed 20% of REIT portfolio earnings.

The company added $313.2 million to its REIT portfolio in the third quarter, which has grown by some $900 million from the second quarter. In three separate transactions, Aames has securitized roughly $3.4 billion.

Until the third quarter, Aames had primarily kept the higher margin mortgages it originated and sold the more vanilla, lower margin, fixed-rate and higher FICO loans to the secondary market. As a result, the company saw a 100 basis point jump in gain on sale margins. In the third quarter, Aames sold some $915.5 million into the secondary market, earning a 2.14% net gain on sale, compared to a 1.14% net gain on sale in the second quarter. The company anticipates gain on sale margins to decrease in the fourth quarter from third quarter levels.

"We continue to be cautious on the premium of loan sales going into the fourth quarter," said Aames Executive Vice President and CFO Jon Van Deuren.

Meyerson said the subprime market is beginning to act more prudently than it had in the past to rising short-term interest rates, adding that he anticipates average coupon rates to hit the 8% mark by mid 2006, if not sooner. Among the loans originated in the lender's retail branches, where competition is not as fierce, weighted average coupons have come as high as the 7.7% range, he said.

The lender originated $1.9 billion during the quarter, a $316.3 million increase from the second quarter and a $35.3 million increase from a year ago. So-called traditional hybrid loans constitute about 61% of production, while interest-only volume is about 13.5%. The average FICO of Aames borrowers is 622.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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