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Piecing It Together

 Originally appeared in the print edition of TheMReport magazine.

Industry executives chime in on creating and maintaining a successful lending shop.

By Sandra Lane

There have always been basic rules for establishing and maintaining a successful lending business, but with the advent of the new federal compliance regulations, lenders now have to change and adapt in order to survive. Whether the lender is a large or small enterprise, some have developed unique ways to develop and expand their businesses.

Diversity Is Key to Survival

Surviving in the challenging and changing mortgage environment of today depends on diversifying in several areas, believes David Abrahamson, COO of Atlanta-based Equity Loans. “Predictions are that there will be fewer originations in 2014 than in 2013. The key to being successful in this market is to have different channels of income,” he explained. “In a contracting market, the key to being successful is to create more income streams.”

With this in mind, Equity Loans, established in 2008 and already offering wholesale, retail, and correspondent lending, is continually looking for additional loan products. “I think one of the things we’re good at is expanding our loan product line,” Abrahamson explained, “and we’re always looking at new products as long as the risk level is to our liking.”

Presently licensed in 32 states and the District of Columbia, with 25 offices throughout the eastern United States, Abrahamson says the company is considering the acquisition of mortgage companies that are struggling to survive in the new regulatory environment.

Some people in the mortgage industry question the viability of expanding in a declining market. However, Abrahamson disagrees. “Those who stay stagnant are not going to grow. You have to keep your foot on the accelerator cautiously,” he explained. “If you’re not looking for ways to grow your organization, you’re going to shrink.”

Other factors in the success of Equity Loans include keeping up to date on changing regulations. “We are in a very tough compliance world, and you have to stay on top of that,” he said. “Make sure you have strong policies and procedures and follow them to the letter. Those who do will survive.”

Equity Loans also strives to be well-informed concerning compliance issues and tries to anticipate regulatory changes in advance. “We run a tight ship when it comes to compliance so that we can put things into place before they are required,” Abrahamson said. “That will enable us to pass all these audits without any difficulty.”

Another pearl of wisdom from Abrahamson is that although your company may be making money, it’s a good idea to prepare for less profitable times. “You have to be conservative concerning the dollars you spend and watch every penny because cash is king,” he said. “Investing your earnings back into the company ensures that you will weather lean times.”

Growing by Acquisition

While other lenders and mortgage companies are scrambling to accommodate the new compliance requirements for lending, LendSmart Mortgage, located in a suburb of Minneapolis, is searching for companies to purchase and add to its lending network.

“Because of the regulatory challenges, 2014 is going to be a year of contraction,” said Rick Roque, VP of corporate development. “Small and mid-size mortgage banks are looking to be acquired or to merge with companies that are stronger financially.”

This action is prompted by the fact that due to the rising costs in the mortgage environment, lenders will have to sell twice the amount of volume to make the same profits they made in 2013. In addition, they will have to do that with fewer mortgages. “That is the cause of the problem, but most companies don’t understand this,” Roque said.

“Most companies can’t afford to do what needs to be done.”

The problem, he explains, is that a large number of companies simply do not have the cash to pay for the adjustments required by the new lending laws. “When you add up the cost of legal and compliance documentation, staff training, and updated technology, there is well more than $100,000 of work to be done there alone,” he said. “Most companies can’t afford to do what needs to be done.”

Roque predicts there will be three strategies for survival in 2014:

Take the Defensive Approach. A lot of the larger companies may decide to lose money this year, but they will still survive because they made so much money in the last year or two. They have cash to keep the doors open and pay their employees.

Shut Their Doors. Many economists predict that 30 percent of all mortgage companies will go out of business. They can shut their doors or become part of a larger company.

Growth by Acquisition. Some companies will buy or absorb other companies. Less prosperous companies that want to stay in business will decide to be acquired by another company.

“A lot of people saw this coming, but didn’t take action to prevent it,” Roque said. “It seems that some mortgage lenders are not good businesspeople. They spent their cash on salaries and infrastructure, and now in an environment of rising interest rates expected to provide 50 percent less volume, they are caught in a tough situation.”

Roque says that LendSmart conserved its cash and is well capitalized, enabling the company to produce growth by acquisition. He says the company is actively searching for small to mid-size banks that have been selling $40 million to $300 million per year. Other factors that influence the company’s decision on whether to buy a company are its footprint (location), leadership, loan offerings, and cost structure.

Specialty Firms Target Specific Markets

Just as the selection of mortgage loans is diversified, so are mortgage lenders. Some mortgage companies and banks are large and have an extensive menu of loans to choose from. Still others are targeted and focus on one particular area of lending. This description applies to WDB Funding, a Salt Lake City-based alternative lending firm organized approximately 18 months ago.

This specialized lending firm, with a controlled growth trajectory, focuses on “hard money lending,” which it identifies as loans for clients whose credit capacity and financial background are challenged or the collateral being financed is unique in nature. It also consists of short-term interim loans.

According to Andy Pollock, president and CEO, the purposes for which his firm provides lending fall into five categories: (1) a client wants funding to sell or buy a home; (2) a client wants 12- to 36-month financing to purchase a property, rehab it, and then flip it; (3) a property owner wants to refinance a property so that it can be rented; (4) someone wants financing for a lease/purchase property; and (5) an investor wants to build a spec house and then sell it.

“There are many times when bridge financing is needed, such as when several real estate transactions are dependent on each other and perhaps one is not going to close on time,” Pollock added. “In this situation, there is a need for interim financing.”

WDB Funding provides funding to mortgage brokers, small retail mortgage companies, real estate developers, and real estate investors, among others. The company also responds to referrals from regional banks and credit unions that do not offer that type of financing.

Pollock believes that because his company is specialized, it can compete on products, processes, sales, and service in addition to providing clients with more specific and face-to-face counseling. “We work to simplify the process and make it understandable for our clients,” he added.

His formula for success is based on offering best values, personal attention to clients, and persistence. “No matter how big or small a company is, you have to treat it as a startup,” Pollock said. “Each day we start over, and we never take a client for granted.”

Success Still Depends on Basic Principles

Although the new lending rules require many adjustments, some lenders are well prepared to accommodate the changes and plan to continue following their long-established formulas for success. One example is Troy, Michigan-based United Shore Financial Services (USFS), which is located in the Detroit metropolitan area.

“We are ready for the new rules and are embracing them,” Mat Ishbia, USFS president and CEO, explained. “USFS has made all the proper changes to be in compliance and to assist partners and clients in navigating the changes.”

However, while embracing the new regulations, Ishbia does not see any disruption in his company’s trail of success using its basic guidelines. These include providing clients with superior service, a variety of innovative products, and exceptional value with an emphasis on empowering USFS employees as well as customers. “It’s the little things we do that make a difference and that set USFS apart from other lenders,” he said.

Established in 1986, USFS is one of the largest and fastest growing independent mortgage lenders in the country, offering three brands that cover the entire spectrum of residential mortgage lending. These include United Wholesale Mortgage (UMW), a leader in the wholesale mortgage field; Shore Mortgage, a direct-to-consumer online mortgage company; and Capital Mortgage Funding, one of the largest retail mortgage lenders in Michigan. Together, these three companies employ more than 1,200 team members.

Through these three brands, USFS offers some innovative loan programs and strong support to the lenders and individual clients it serves. UMW clients include independent brokers, banks, and credit unions in all 50 states. UMW helps to ensure their success by supporting them with rapid communication, underwriting consistency, and superior client service. These principles supported the company in closing almost $2.3 billion of wholesale loans in the third quarter of 2013.

Other USFS services to brokers include a free service that funnels mortgage leads back to them; Income Calculator, a tool that helps brokers accurately determine borrowers’ wages; and Flex Term, a “pick-your-term” amortization product.

Innovative programs for individuals through Shore Mortgage include Work Perks, a new program that provides discounted closings exclusively to employees of enrolled businesses such as hospitals and large corporations. Another program is Shore Before, which gives final approval for a loan amount before an offer is actually made on a property. Shore Mortgage also offers closings in as few as 14 days.

In addition to the many USFS offerings and support programs, Ishbia says the real secret of the company’s success is USFS employees. “We take care of our employees so that they will take care of our clients,” he said. “Mortgages are a commodity, but in general, it all comes down to how you treat people. Our employees are the best at making the process of obtaining a home mortgage an easy process.”

To accomplish this, Ishbia says that USFS employees must go through a lot of training before they are allowed to talk to clients. “Creating a mortgage is a big transaction, and we want to have intelligent people on the phone who know our products well and can explain all the details associated with them,” he said.

In addition to superior training, USFS employees work in an unusual and inspiring environment. Last year, the company’s 1,200 employees moved into a new headquarters with more than 140,000 square feet. It features many amenities including a cafeteria for breakfast and lunch, a fitness center, dry cleaning pick-up/drop-off services, a Starbucks coffee shop, and a 24-hour self-serve convenience store.

There are various lounge areas, decorated in bright colors, where employees can enjoy free coffee, tea, and sodas while watching LCD flat screens, or practicing their athletic skills on the putting green or basketball hoops. Walkways throughout the no-interior-wall building feature artificial grass, sidewalks with manhole covers, and street signs that identify departments. Each of the 23 conference rooms is named for a city in Michigan.

Probably the most valued perk for employees, particularly in Michigan’s cold weather, is the front-door valet parking offered to team members only. Executives have to park their own cars out in the snow and walk in.

Another innovation at USFS is that employees are urged to have a work/life balance. “Your job and your career are not your life,” Ishbia explained. “Not everyone wants to work 80 hours a week. Give me 40 hours of concentrated effort and then go home and be with your family.”

Combining all of these principles adds up to an ongoing formula for lending success.

About Author: Sandra Lane

Sandra Lane has extensive experience covering the default servicing industry. She contributed regularly to DS News' predecessor, REO Magazine, from 2004 to 2006, covering local market trends, the effects of macroeconomic shifts on market conditions, and "big-picture" analyses of industry-driving indicators. But her understanding of the mortgage and real estate business extends even beyond those pre-crisis days. She is a former real estate broker and grew up in what she calls "a real estate family." A journalism graduate of the University of North Texas, she has written articles for various newspapers and trade journals, as well as company communications for several major corporations.
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