First Street Financial shuts its doors

First Street Financial, a major subprime lender, shut its doors as of June 15th a pre-recorded message at its main 800 number. Their web site is also down.

I think a number of these smaller banks get in to trouble by trying to aggressively go after business and win it from larger mortgage companies (like Countrywide, IndyMac and others). Consider how a sales rep for a company like First Street wins business:

Sales rep cold calls broker shops in their territory soliciting business.
Brokers say "I’m happy with my lender, thanks any way."
Sales rep says "If you have any tough loans that your lender can’t do, let us try to get them done for you"

This is the number one entrance point for new banks at brokerage shops. The easiest way to build a relationship is to get a "tough" or "dirty" loan done. The problem is that once you are that aggressive in your underwriting guidelines your bank becomes known in the shop as "the bank that can get the tough loans done." And guess what? Only the tough loans flow to that lender.

So these small banks have essentially pre-selected the cream of the crap in mortgage loans. Once that crap starts flowing back downhill via loan repurchases, etc. these lenders get paralyzed by lack of liquidity and credit and go bust.

I’m not saying that is what happened with First Street, but it is a common refrain in our industry. Our First Street rep came in and said give me your "bone pile" (dead loans) and let me see if there is anything I can do for you guys…. ’nuff said.