IPO VIEW-Subprime, securitization, in ex-AIG lender's plan

NEW YORK May 23 (Reuters) - Springleaf REIT is telling stock investors that subprime mortgage lending is a great business, an ambitious argument in a market still reeling from bad underwriting.

The company is an offshoot from Springleaf Finance, a former credit arm of American International Group, (AIG.N) and it said in a recent regulatory filing that it hopes to raise up to $500 million for a real estate investment trust that will first invest in existing mortgages and other consumer loans.

It will be the first REIT to delve into new subprime mortgages since the financial crisis. What's more some of those loans may one day be packaged into bonds.

"A lot of people are trying to get back into that business, but for Alt-A and subprime, I think there's a lot of risk of potential price volatility as we can see for example now," said Marina Tukhin, managing director of the asset-backed securities group at Gleacher Descap in New York.

Springleaf is looking for capital along with Pacific Investment Management Co and at least six other money managers and private equity firms that have formed new REITs, though those plan an initial focus on mortgages guaranteed by the U.S. government. [ID:nN08167705]

The Springleaf filing follows just weeks after Angelo Gordon's AG Mortgage Investment Trust Inc postponed a $250 million IPO. [ID:ID:nWEN2247]. That offering failed because the REIT didn't fully identify assets it would buy, turning off skittish investors, said an investor and an analyst.

Springleaf is 80 percent-owned by Fortress Investment Group (FIG.N), the private equity firm run by former Fannie Mae Chief Executive Officer Daniel Mudd. Fortress acquired its stake in November from AIG's AIG Capital Corp., which kept the remaining 20 percent in one if its units. Springleaf and a Fortress spokesman declined to comment.

The U.S. Treasury owns 92 percent of AIG, and is planning to begin selling its shares with a $9 billion stock sale.

American General is no stranger to securitizations, having done many until the financial crisis hit. Since then, it has sold a pair of private issues backed by old loans.

"We expect to be a significant participant in the reemergence of this important market as the new private RMBS market takes shape," Springleaf said in the filing.

Since the 2008 financial crisis, investors have been suspicious of home loans, unless the U.S. government was guaranteeing the credit risk. But borrowers are starving for credit, and Springleaf's REIT could find demand for subprime mortgage bonds if the deals are put together properly.

"If a deal is well underwritten, has a strong servicer, an originator who has a track record, enough credit enhancement and skin in the deal, people will invest in a subprime deal," said Paul Norris, head of structured finance at Dwight Asset Management in Burlington, Vermont, which oversees $54 billion.

Springleaf's IPO comes at a time when availability of mortgage credit has shrunk to its lowest in a decade or more, locking out millions of borrowers from getting home loans. Banks are trying to improve underwriting by making it harder for some borrowers to get loans, and new government regulations are likely to also tighten the availability of credit.

Springleaf REIT will buy assets from Springleaf Finance, which has 1,100 branches. Springleaf Financial in December had $13.4 billion in real estate loans, including subprime,

Springleaf and other such companies can grow as implementation of Dodd-Frank financial regulations result in the "over-banking" of borrowers that can meet today's strict standards, said David Akre, principal for Whole Loan Capital, a mortgage trading and advisory firm.

Regulations will draw a line in the sand, with borrowers who meet higher standards being "over-banked," while others who can make down-payments and pay monthly bills are locked out, said Akre, who co-founded New York Mortgage Trust in 2003.

"The opportunity created by borrowers outside the lines needing credit will be enough to restart some form of non-traditional lending," he said.

When that happens is anyone's guess. Wall Street banks and REITs have been trying for two years to restart the market for private mortgage-backed securities with top-quality loans. Just two issues backed by new loans have been sold since 2008, with banks noting that low interest rates are failing to cover regulatory costs and the yields demanded by investors.

Springleaf is also raising capital as home loan originations will fall by a third to $1 trillion in 2011 and 2012, according to a Mortgage Bankers Association forecast.

(Additional reporting by Alina Selyukh; Editing by Andrew Hay)