Bad credit boom.

Aames hits jackpot by catering to credit-impaired borrowers

LOS ANGELES - A company that lends money to down-and-out borrowers is moving up in the world.

Mid-Wilshire-based Aames Financial Corp., parent of Aames Home Loan, saw its earnings triple and its revenues double in its recently ended fiscal year.

The company, which lends to "credit-impaired borrowers," people who would not qualify for bank loans, has seen its stock soar from $18.87 in January to $47.62 in August, an increase of more than 150 percent.

Just last week, Aames announced it has signed an agreement to acquire One Stop Mortgage Inc., a Costa Mesa-based impaired-credit lender, in a $128 million stock deal.

The acquisition will boost Aames' work-force from about 700 currently to 1,000, and will increase its network of lending branches from 48 to 73.

As further evidence of its ascent, Aames is moving its headquarters from the Mid-Wilshire area to the top of Two California Plaza, one of the premier towers in downtown L.A.'s financial core.

"I'm having a great time," proclaimed Gary K. Judis, Aames' chairman and CEO, who credits his veteran management team for the company's success.

Aames has been serving the market of people "with less-than-perfect credit" ever since its founding in 1954, Judis said. Some borrowers are self-employed, some are unemployed and some have problems paying medical bills, he explained.

"Divorced women who have been out of the job market for 15 years have a very difficult time borrowing," he said.

While traditional lenders base their loan approvals on credit quality, Aames bases its approvals on the borrower's collateral quality, usually the value of the house the borrower owns, Judis explained.

He added that Wall Street, which has only begun to securitize B-, C-, and D-quality loans, is a big reason Aames is growing so rapidly.

Securitizing loans involves packaging loans into large pools and then selling stakes in those pools (in the form of securities) to investors.

Wall Street began securitizing impaired-credit loans backed by collateral in the early 1990s, Judis said. That participation by Wall Street has provided Aames with a large source of capital with which to grow.

Aames has posted record earnings for nine quarters in a row, and Judis seems to enjoy pointing out that he has confounded Wall Street, beating analysts' estimates for nine consecutive quarters.

"They look just fabulous," raved Charlotte Chamberlain, bank analyst with Wedbush Morgan Securities in L.A, referring to Aames' earnings record.

"This company that services these under-served markets is basically kicking butt on the A-quality lenders," she said.

Michael Diana, an analyst with Bear Stearns & Co. in New York, said Aames "is an amazing story."

Diana lays all the credit for the success at the feet of Judis.

"Gary is a pioneer," Diana said. "You wouldn't be too far wrong to say that he invented (the B-through D-quality lending business)."

Aames lends money at much higher interest rates than those that banks charge. On a typical loan, Aames charges an upfront fee equal to between 4 and 8 percent of the loan amount, plus an annual interest rate of 10 to 11.5 percent, Judis said.

Traditional "A" lenders make loans with annual interest rates around 8.5 percent and charge zero to 2 points upfront, banking experts said.

Diana noted that, although Aames makes loans to people with bad credit, its risk is relatively low. That is because the company securitizes the majority of its loans and because Aames' loan-to-value ratio is much lower than traditional "A" lenders, he said.

Aames loan-to-value ratios are in the 50-to-80-percent range, compared with ratios of 80 to 90 percent for most traditional lenders.

The fact that A-quality lenders, such as Pasadena-based Countrywide Credit Industries Inc., are trying to get a foothold in the impaired-credit lending business is further evidence of its profit potential.

Paul Abbamonto, senior vice president of B- and C-quality lending for Countrywide, said the company has funded about $530 million in loans to borrowers with impaired credit in the past year.

In the last few months, Countrywide has opened two "pilot branches" to continue testing the potential of the B- and C-quality lending market, he said.

Irwindale-based Home Savings of America also has begun making B-quality loans in recent months, said Samantha Davies, Home Savings spokeswoman. Currently, Home Savings' involvement in the business is tiny, less than $10 million, she said. But the thrift could expand its impaired-credit lending business in the future.

Judis said he is not worried about big A-quality lenders stealing market share from Aames. His senior managers know the impaired-credit business, and. they are loyal to Aames, he said.