Friedman Billings Ramsey is expected to file an S-1 shelf filing with the Securities and Exchange Commission for a home equity ABS dealer shelf in coming weeks, the first for the Arlington, Va.-based firm, sources said.

Officials at FBR had not returned phone calls seeking further comment on the new shelf at press time. The revelation is in line with FBR's acquisition of non-conforming mortgage originator First NLC Financial Services, announced last week. The transaction exchanges a 100% equity stake in NLC for $88 million in stock and cash paid to an affiliate of private equity firm Sun Capital Partners, and is scheduled to close in late February, according to a statement from FBR. NLC should have a tangible book value of roughly $16 million at the time of closing, and originates roughly $4 billion annually.

During a conference call, FBR Co-chairman and Co-CEO Eric Billings outlined the strategy underlying the acquisition. "We currently manage a mortgage portfolio of $11 billion in agency mortgage-backed securities," Billings said. "The acquisition is part of a broader mortgage investment strategy that will expand the types of mortgage assets we own."

To that end, the firm intends to reallocate between 25% and 50% of the existing capital dedicated to mortgages to non-conforming loans over the first half of 2005. That figure could be as high as 70% by year-end, depending upon market conditions, Billings said.

"We will redeploy about $500 million of our equity capital over the first couple of quarters from the agency-backed spread business to the non-conforming business through securitization funding," Billings also said.

As much as $700 million of equity capital could be diverted to the non-conforming sector by year-end, Billings added.

NLC's current production is comprised of approximately 85% wholesale and 15% retail originations, split down the middle between new home purchases and refinancings. The average FICO score comes in just shy of 640, while the weighted average coupon is at 7.30%. Additionally, the firm intends to purchase mortgage insurance to bring the LTV on the portfolio down to 50, FBR executives said during the call. NLC has six operation centers and between 20 and 30 retail branches.

While the main goal of the acquisition is to hold the assets, some of the production will be sold on a whole loan basis. The firm will hold most of the ARM product, potentially selling between 15% and 20% of the production, executives said.

The purchase of NLC is merely the first phase of FBR's game plan in the non-conforming business, as the bank has plans to leverage its existing relationships with other mortgage originators. "We intend to acquire other non-conforming mortgage assets from other originators early on so that as we allocate our equity capital . . . we will be able to sufficiently acquire and originate assets in quantity to get that capital effectively deployed over the course of the year," Billings said.

The firm has not yet purchased any non-prime loans from other originators. However, there is a loan purchase and warehouse agreement in place with NLC to begin purchasing loans prior to the close. An estimated 15% greater return on equity is accrued by owning the originator as opposed to purchasing the assets, Billings said.

FBR is seeking to achieve a significant improvement in its return on equity through the reallocation. "The transfer from agency to non-conforming will allow us to increase our return on equity somewhere in the vicinity of 15% on average over time," Billings said.

The acquisition comes shortly after FBR launched an MBS trading desk with the hiring of several former members of Freddie Mac's disbanded securities sales and trading group (see ASR, 1/10/04). FBR was in the market last week as joint lead with RBS Greenwich Capital on a $500 million offering from Equity One Inc.'s Popular ABS Mortgage Pass-Through Trust.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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