The housing downturn tested the mortgage industry. Pacific Union Financial, LLC, rose to the challenge and found its own niche in the marketplace.
By: Elaine Pofeldt
Though we are now seven years removed, the aftershocks of the housing crisis can still be felt. In today’s changing industry landscape, smaller, independent companies have opportunities like never before. No longer are only the largest banks able to compete for significant market share in the lending space. Instead, a new crop of entrepreneurs are offering loan products that are attractive to both home buyers and mortgage originators who have previously been underserved in the marketplace.
One such innovator is Evan Stone, founder of Pacific Union Financial, LLC. Founded in 2004, Pacific Union Financial weathered the Great Recession by adapting to the changing marketplace, rather than rallying against it. Though Pacific Union Financial began its life as a retail lender, it has thrived through diversification. Today, the company offers wholesale, correspondent, retail, and warehouse lending, as well as mortgage servicing, and it serves as a guide for other independent companies looking to fill today’s lending gap.
The Retreat of the Big Four
Pre-housing crisis, four big mortgage banks loomed over the rest of the marketplace. However, because these entities—Bank of America, JPMorgan Chase, Wells Fargo, and CitiMortgage—held the majority of origination share pre-2008, they were hit the hardest by the market downturn, and the rise of subprime-related lawsuits further hurt their balance sheets.
In response, corporate strategies changed in the last few years as big banks began to remove themselves from the marketplace.
“As some banks retreat from the home-loan market, specialized mortgage companies are stepping in to fill the void,” wrote Joe Light in a 2014 Wall Street Journal report. Light, who covers housing and mortgage for the paper, elaborated on the underlying reasons, saying, “Mortgage lending at big banks such as Wells Fargo & Co. and JPMorgan Chase has dropped more quickly than the rest of the industry in the wake of large mortgage-related legal settlements, new banking standards that require lenders to carry more capital, and increased scrutiny from regulators.” This shift in power did not go unnoticed.
The Rise of Nonbank Lenders
It has been a long journey for Pacific Union Financial since its start in 2004. But early on, founder Evan Stone recognized that smaller, nonbank lenders had greater flexibility to change with the market than larger banks.
“People thought I was going to go out of business,” Stone says, “and they thought of me as a young cowboy that wasn’t properly considering risk.”
Since then, Stone, 37, has turned Pacific Union Financial, based in Irving, Texas, into one of the top independently owned mortgage lenders in the country. The once tiny company is now a direct lender and servicer with Fannie Mae, Freddie Mac, and Ginnie Mae, and it is on pace to fund $15 billion in mortgage volume this year. Sure, this doesn’t rival the numbers the largest banks pull in, but it represents how much the market has changed since 2008 and the opportunities now available for even smaller, non-bank lenders.
“Pacific Union has been one of the success stories,” says Tim Nguyen, co-founder and CEO of BeSmartee, an online marketplace that he dubs “an Expedia for mortgages.” “They’ve grown tremendously in the past 11 years.”
BeSmartee has never served Pacific Union, but, Nguyen says, “You keep an eye on the clients you wish you had.”
Success through Adaptation
When Stone founded Pacific Union Financial, he did it with only two loan officers and one loan processor in a 1,000-square-foot suite in San Francisco.
“The office was dirty,” Stone jokes. “It was small. It was a true startup. We weren’t going to spend one penny for niceties.”
By the end of 2005, the company had built enough net worth to transition from being a mortgage broker to a mortgage lender. It began lending in 2006, and operating from a new office in Walnut Creek, California, Pacific Union Financial had a staff of 75 employees.
Then in 2007, mortgage markets started to unravel. “Securitizations were stopping,” he recalls, reliving the stress. “We couldn’t get loans funded.” Stone, not yet 30, was not sure what to do. “I’d never seen multiple business cycles at this point,” he says. “I kept thinking it’s got to get better from here.”
The company lost some money but still had cash reserves from the good years. Things fell apart in the middle of 2008. “I was three payrolls away from being personally and professionally bankrupt,” he recalls. “I didn’t know whether to take the remaining money I had and go do something else or hope somehow over the next six to eight weeks things changed. I didn’t have a penny left to my name. I had a mortgage and wife.”
As the business got closer and closer to failure, he grasped unsuccessfully for a path out of disaster. “Some days we wouldn’t even show up for work,” he says. “It was like, ‘What’s the point? We’re just going to get our butts kicked.’”
Finally, salvation arrived in the form of an employee named Jake Howard.
“These old leads you’re making us work, we can’t close these,” Howard told him, “but the good news is I was on this mortgage broker blog. All these mortgage brokers are posting deals they’re having a hard time getting done. We can do a lot of these deals. Would you be okay accepting applications from brokers?”
The company started taking applications from mortgage brokers, becoming a wholesale lender.
“That turned everything around,” Stone says. “We went from being close to closing our doors to being profitable in 2008.”
Why It Worked
Stone credits four critical changes made within Pacific Union Financial as to why the company was able to thrive while other lenders during this time did not.
The first, of course, was moving from a retail model to a wholesale model in 2008. “We entered this segment of the market when mortgage brokers had fewer choices. This decision allowed us to save the company with a pure focus on wholesale,” Stone says.
The second change was the decision to use size to its advantage. “In 2009 it became clear to me that the large aggregators Wells Fargo, Bank of America, JPMorgan Chase, and Citi were putting heavy credit overlays on top of FHA guidelines, such as a minimum 640 credit score. Since our underwriting process was less automated than those banks, we could take the time to consider and be more selective with other credit criteria; we chose not to write off borrowers simply because of their credit score,” Stone explains.
In order to open credit access to a higher segment of borrowers, Stone says for loan applicants with lower credit scores they don’t allow debt-to-income ratios over 40 percent, look more closely into housing-payment history, and weigh applicants’ tenure on the job more heavily, in addition to being more conservative with loan-to-value ratio. The average FICO score of a Pacific Union Financial borrower is 720.
“By taking that approach, we were able to put a lot of borrowers into homes that we wouldn’t have been able to otherwise,” Stone says. “By building in some additional margin, we could flourish in the market. We didn’t have the strict competition of going head-to-head against the big guys. It opened doors to work with both borrowers and originators who we might not have otherwise worked with because we were offering other products.”
Stone cites becoming Ginnie Mae approved as a crucial part of this step, as it allowed Pacific Union to keep their own loans rather than having to sell them to the big four. “We recognized the opportunity not to be beholden,” he explains.
For other lenders wanting to follow this path, Stone says to start immediately. “It can take a year to year and a half to get approved by Ginnie Mae. We got approved late 2010, and it took us 20 months.”
Currently, fewer than 2 percent of Pacific Union’s mortgages are 90 days late or more, he says. Stone credits this system of checks and balances as the reason why.
The retreat of big banks also led to the third major change that took place within Pacific Union Financial. “In 2011 Bank of America made the business decision to exit the correspondent lending space, and that had a ripple effect, because they were such a large buyer of loans,” Stone says. “When the No. 2 player exits the market and other companies begin to follow suit, it opens up a lot of opportunity.”
In order to take advantage of this market shift, Pacific Union Financial established a correspondent lending platform to give lenders liquidity for their loans. “It allowed for us to spread our operational costs, and allowed for us to start building a significant mortgage servicing portfolio,” Stone says.
The fourth change was the biggest one to Stone personally, but it has also allowed the company to reach new heights. As Stone scaled the company, he began to have doubts he was the right person to lead it. “I realized I’m not,” he says. “If I wanted to give Pacific Union the best chance of long-term, sustained success, I needed to find a more experienced and mature CEO. That CEO would likely replace a number of the existing executive team members.”
After conducting an exhaustive, nationwide search for a CEO, he found a new leader in Rick Skogg, who had been COO of Aurora Loan Services and most recently served as executive director of the institutional lending group at MetLife Bank.
“The majority of our loans at that time were originated third-party,” Stone says. “This was where Rick lived and breathed. His performance track record in that space was second to none.”
In April 2012, Skogg came on board. “The growth under his leadership has been phenomenal,” Stone says. Skogg has also deepened the company’s compliance bench, according to Stone. “Rick has allowed me to sleep better at night. My investment is better protected under his leadership.”
In the same methodical way that Stone outlined the pillars of his success, he also outlined things he would have done differently if he had the knowledge he has now. The main takeaway for other industry professionals? React faster to the changing environment and don’t be afraid to “pull the trigger.”
“I probably would have tried to find ways to be more differentiated early on,” Stone says. “I probably would have fired myself a year earlier . . . I probably would have tried to gain Ginnie Mae approval a couple years earlier and built a servicing platform earlier. Back in 2008, I may have timed the transition from retail to wholesale well, but in retrospect, instead of waiting until 2014 to start building a strong retail platform, we probably could have benefitted from starting that process a year or two earlier.”
In addition, Stone urges others to realize that focusing on building a healthy corporate culture is crucial. “The people that you work with need to understand the DNA of the company, and there needs to be cohesiveness with the team,” Stone says. “Like a competitive sport, the company is really a team, and I would have built more of a team culture early on. This is an area where Rick has been really helpful.”
Stone may have been early to the game, but as the economy healed, more independent mortgage lenders jumped into the fray. “It’s funny,” says Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage, and a mortgage advisor at C2 Financial Corp., in San Jose, California. “People think it’s either prime or non-prime. In reality there are really quite a lot of choices in between.”
Competitors in California include Angel Oak Funding and Woodland Hills Mortgage Corp., Fleming says. For non-prime mortgages, he works with Bank of the Internet, another Pacific Union competitor.
Despite mounting competition, Stone sees plenty of opportunity for growth. “Three years from now I think the mix between purchase to refinance will be different,” he says. “Today, while Pacific Union has a strong focus on purchase business, industry wide, refinance transactions comprise a large percentage of total mortgage origination volume. Three years from now, I think we all hope that there is a greater supply of housing and there are more borrowers who can qualify to be first-time home buyers.”
In addition, Stone sees more private money entering the market. “There is already a movement underway. You are starting to see private money enter the marketplace,” he says. “For the last seven years it’s predominately been either direct or implicitly implied government-backed loans, and I definitely think within three years non-government, institutional money will absorb a meaningful percentage of the secondary mortgage market, and that, in turn, will create opportunities for first-time home buyers. Guidelines are still, historically speaking, stringent, but some credit loosening will occur to help first-time homebuyers get into homes. Non QM mortgages will represent a larger percentage and that means a greater opportunity for homebuyers.”
No matter the changes that arise, Stone plans to keep the core values that built his company. “We have been a consistent player in the industry. We don’t pull out on products or channels on a whim. We stay the path.”
Editor's note: This select print feature appears in the November 2015 edition of MReport magazine, available now.