With its founder and a private equity firm sharing ownership of its new parent company, Metrocities Mortgage LLC is putting its dalliances with subprime lending behind and returning to the company’s roots — forming joint ventures with real estate firms.

Metrocities recently announced the completion of a deal with Sterling Partners, in which the California-based lender will become part of Sterling’s newly formed Prospect Mortgage Co.

With its founder and a private equity firm sharing ownership of its new parent company, Metrocities Mortgage LLC is putting its dalliances with subprime lending behind and returning to the company’s roots — forming joint ventures with real estate firms.

Metrocities recently announced the completion of a deal with Sterling Partners, in which the California-based lender will become part of Sterling’s newly formed Prospect Mortgage Co. LLC.

Although terms of the transaction were not disclosed, Sterling Partners plans to invest about $100 million as it enters the mortgage lending industry, Metrocities founder and Chief Executive Officer Paul Wylie told Inman News.

Wylie, who has an equity ownership stake in Prospect Mortgage, said Metrocities will continue to operate under that name, “and there will be additional acquisitions by Sterling that will become part of Metrocities.”

Established in 1989 and based in Sherman Oaks, Calif., Metrocities was not a major player in subprime lending, Wylie said. But the company did not emerge from the fallout of the upheaval in subprime lending entirely unscathed.

Metrocities owned a stake in subprime wholesaler Acoustic Home Loans, which closed its doors last year. Another Metrocities affiliate, Alt-A jumbo wholesaler No Red Tape — which last summer announced plans to double its sales force — “is in the process of being wound down, and will not be retained as part of Metrocities Mortgage,” Wylie said.

No Red Tape “doesn’t fit in with the strategy, and that entity did have its share of issues related to loan quality,” Wylie said. “It was focused on wholesale Alt-A and Alt-B, and like its (competitors in that category), did experience significant rates of delinquencies, defaults and fraudulent loans.”

Subprime lending never accounted for more than 10 percent of Metrocities’ business, Wylie said, and is less than 5 percent today.

But while Metrocities and its affiliated companies laid claim to having closed more than $10 billion in loans in 2005, the company says loan production topped $5.7 billion in 2006.

Like many other privately held, non-bank lenders, Metrocities borrows money to fund loans, and depends on investors to buy them in the secondary market. Many private label lenders have struggled or closed their doors in recent months as rising delinquencies and foreclosures caused some to lose the lines of credit they used to fund loans, or were forced to repurchase loans that went into early payment default.

Although Metrocities was involved in “negotiations with institutions that purchase our loans,” those discussions did not dent the company’s originations, and were not the motivation for the deal with Sterling Partners, Wylie said.

Retail loan volume in the first quarter of 2007 was off by approximately 2 percent year-over-year, compared with a 25 percent decline for the industry as a whole, the company said.

With more than 7,000 proprietary loan programs — and the capability to broker mortgages and sell closed loans for “all the major household names” — Metrocities is “always able to find the appropriate product” for borrowers, Wylie said.

What attracted Sterling Partners to invest in Metrocities, the company’s founder said, was its joint venture program, experienced management, and company culture.

“Sterling has a history of investing in companies where the management team wants to stay in place,” but which are looking for capital to invest in technology and expand their operations, Wylie said.

A key component of Metrocities’ expansion plans over the years has been the joint ventures it enters into with real estate brokers. The jointly owned companies, called affiliated business arrangements, or ABAs, allow Metrocities to place loan officers directly into real estate offices. Participating real estate brokerages share in startup costs, expenses — and profits. Although ABAs are permitted in most states, there are many restrictions on their operations intended to protect consumers.

In December, Metrocities announced that the number of joint ventures the company has formed with real estate brokers, credit unions, financial advisors and builders had surpassed the 200 mark. Based on its own analysis of available data, Metrocities claims to have formed more joint ventures than any other large U.S. lender.

The long list of brokerages that have entered into ABAs with Metrocities includes RE/MAX Gold and other RE/MAX offices offices in central and northern California; Windermere Real Estate brokerages in Los Angeles, Las Vegas, Palm Desert and Palm Springs; Keller Williams Realty brokerages nationwide; GMAC/Dilbeck Realtors in Los Angeles; Diane Turton Realtors in New Jersey; Zephyr Real Estate in San Francisco; Prudential Real Estate offices throughout the Los Angeles area; Coldwell Banker offices in California; Realty Executives offices in Arizona; and “multiple” Sotheby’s and Century 21 offices.

Metrocities’ joint ventures are concentrated on the coasts, but the company is looking to expand into all major and mid-sized metro areas, Wylie said.

Although the growth in joint ventures has been rapid, it hasn’t been quite as speedy as Wylie predicted in an April, 2006 interview with the San Fernando Valley Business Journal. At the time, Wylie said Metrocities was forming two joint ventures per week, and expected to hit the 250 mark by the end of the year.

The company’s primary focus remains joint ventures, Wylie said.

“It’s not a division of our company, but rather our core business built on best practices and a track record,” he said. “We have a successful business model, which is why Sterling approached us and invested in our company.”

Wylie claims Metrocities has a better track record than other lenders in sustaining the joint ventures it creates.

“Most real estate companies that have been around a long time have historically been through four or five mortgage relationships,” he said. “We have a 75 percent success rate in maintaining relationships over a long period of time.”

One reason for that, Wylie said, is Metrocities’ high rate of customer satisfaction, which a third-party analysis has pegged at 93 percent to 94 percent in recent years, he said.

“We know that we are a reflection on the real estate community — when they make the referrals to us, it’s very important they (borrowers) have high customer satisfaction,” Wylie said.

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