Payment Options.

When Washington Mutual reiterated its commitment to focus on home-equity, alt-A and payment-option loan products recently, the move highlighted a growing trend in the loan origination business that will have long-term consequences for loan servicing.

It's not just "B&C lenders" that are expanding further down the credit spectrum these days. The nation's largest conventional lenders - and often the largest loan servicers as well - also are making more pronounced forays into the business of servicing customers who may not qualify for a traditional, A-credit conforming loan product.

Countrywide, for instance, is the nation's largest payment-option lender. Citigroup has combined its prime mortgage lending operation with its nonprime unit, formerly known as CitiFinancial. Just about everybody is looking for ways to emphasize higher margin loan products than the traditional conforming loans sold to Fannie Mae and Freddie Mac.

Nonconforming loans are nonconforming for a reason, of course. In all likelihood, these loan products will have higher delinquency and default rates in the long-term than a plain vanilla, conforming loan. The new loans, with resetting payments on adjustable-rate products and payment-options for borrowers to ...