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More Lenders to Form Underwriting Units
Asset Backed Alert, Harrison Scott Publications Inc. (May 27, 2005)

Ameriquest Mortgage and First Franklin Financial are each taking steps toward the launch of broker-dealer units.

By setting up groups that could participate in the distribution of their subprime-mortgage and home-equity loan securitizations, Ameriquest and First Franklin hope to save some of the millions of dollars of underwriting fees that they pay to Wall Street banks each year. The companies might also have an easier time buying and securitizing credits from third-party lenders and brokers - an area where they often compete with the market's biggest underwriters.

Like WaMu Capital Markets and Countrywide Securities, which is now among the world's most active underwriters of securitized products, Ameriquest and First Franklin would start as co-managers on their own deals and eventually work their way up to bookrunning roles. At least one other big issuer of mortgage-related securities is pursuing such an initiative.

Both Ameriquest and First Franklin have been approaching senior staffers at other underwriters that could set up and run their broker-dealer divisions.

Ameriquest's plan is further along. In March, the Orange, Calif., company promoted Ken Mulford to oversee its underwriting initiative. About a half-dozen recruits are either on board or about to join the New York operation, and many more will likely arrive in the coming months. The new staffers would include a full team of traders.

Mulford, who also oversees Ameriquest's U.S. securitization program, joined the lender in mid-2003. Before that, he held senior roles in the home-loan securitization units at Citigroup and Merrill Lynch.

Ameriquest issued $48.3 billion of securitized products last year and $18 billion so far this year, making it the world's fifth-largest issuer of such instruments, according to Asset-Backed Alert's ABS Database.

First Franklin would utilize a broker-dealer platform that parent National City Bank already maintains for its municipal- and corporate-bond business. In a potential precursor to that move, the San Jose company is expected to begin issuing more of its own securities, reducing its reliance on "renting" SEC-registered shelves from a group of banks that includes RBS Greenwich Capital, Merrill, Banc of America and Lehman Brothers. First Franklin sold $14.5 billion of bonds through such programs last year, along with $3.8 billion over the first four-and-a-half months of 2005.

The broker-dealer may also take over funding of National City's alternative-A loans. National City currently sells those credits to GMAC's Residential Funding Corp., which then securitizes them. A National City spokesperson said only that "we continue to evaluate our capital-markets strategy."

Market players said the broker-dealer operations would have an instant avenue to buysiders, since frequent issuers like Ameriquest and First Franklin maintain close relationships with investors. Likewise, some buyers, including Fannie Mae and Freddie Mac, prefer to deal directly with issuers.

The downside is that issuer-sponsored underwriting units tend to have less access to the secondary market than their more established competitors. There's also concern that underwriters would raise warehouse-funding costs to make up for the loss of business.

To combat such problems, Ameriquest would continue to share bookrunning roles with other syndicate members.

Nonetheless, many mortgage brokers like the idea of cutting out a layer of the funding process. "To eliminate as many of the middlemen as possible is where the industry is heading," one trader said.

Meanwhile, lenders are running into more competition from their underwriters on the loan-origination front. In many cases, the banks have the upper hand as they can fund their own credits without much help from outsiders. Bear Stearns, for example, launched a Scottsdale, Ariz., unit called Bear Stearns Residential last month. The company hopes to produce $1 billion of subprime, home-equity, alt-A and jumbo loans each month. Bear plans to securitize most of the loans.



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