Mortgage blues haven't hit all: Some firms are holding their own despite housing, credit slump

March 24, 2008

The local office of Cleveland-based KeyBank has hired a banking veteran to lead a revamped mortgage department that will boast a larger sales force.

And locally based mortgage firm Signature Group recently completed construction of its new headquarters and added three brokers.

In this climate of ballooning foreclosures and rising interest rates, one might wonder whether executives of the aforementioned institutions are reading the wrong spreadsheets. To the contrary, despite the gloomy picture monthly housing statistics paint, they are among the mortgage businesses that are soldiering on as if the market already has corrected its tailspin.

They may have avoided the allure of subprime loans, courted a clientele with an above-average credit score, or diversified their business models. At any rate, what is occurring within the mortgage industry is not all gloom and doom, industry experts contend.

"There are good opportunities for buyers," said Steve Hardin, a partner in the real estate practice group of Baker & Daniels LLP. "But it appears in part that people remain on the sidelines and are wondering if there's going to be a better deal."

Jim McGuire, president of Tucker Mortgage LLC, whose business is up 30 percent from last year, concurred. With fewer new homes under construction, the amount of mortgages furnished by production builders is declining, giving Tucker an edge, McGuire said.

Yet, statistics indicate the housing slump may get worse before improving.

Nearly 60 percent more U.S. homes faced foreclosure in February than in the same month last year, according to California-based residential real estate research firm RealtyTrac Inc.

Nevada, California and Florida have the highest foreclosure rates, but parts of the Midwest are struggling as well.

Indiana, Michigan and Ohio all cracked the top 10.

In related news, the Washington, D.C.-based Mortgage Bankers Association said filings for mortgage applications fell 1.9 percent the first week of March. Applications to refinance current mortgages also fell, down 4.7 percent.

Saying no to subprimes

Stonegate President Jim Cutillo, a former managing director of GMAC Residential Funding, launched his lending firm in 2005 and is undeterred by the bleakness.

The value of Stonegate's loan portfolio more than tripled from $42 million to $148 million in 2006, according to IBJ statistics, and is up 26 percent from the same period last year, Cutillo said. Acting as an intermediary, Stonegate sells the loans it makes to large, secondary-market investors. About 40 percent of its volume is refinancing, due mainly to homeowners abandoning their subprime loans and shortterm adjustable-rate mortgages.

The lender's convincing growth is fueling its expansion from Indianapolis and Louisville to a Kansas City location opening in April. Offices in Minneapolis, Nashville and St. Louis should follow by June.

Cutillo cited several reasons for Stonegate's prosperity, including his decision to avoid the lucrative but dubious subprime loans that proved so tempting to many.

"I knew I had about 18 months to build the infrastructure [of the company] before the market would actually collapse," he said. "We could have provided subprime mortgages, but I didn't want to build something that ultimately wouldn't be there."

Indeed, scores of lenders no longer backed by large investment firms have vacated the market after homeowners defaulted on their loans that reset at higher interest rates.

The market also has returned to supporting government-backed lending programs such as Freddie Mac, and Fannie and Ginnie Mae. Stonegate is an approved lender of the Federal Housing Administration, which increased its lending limit to $270,000. That covers 80 percent of the homes bought and sold in central Indiana, Cutillo said.

Some banks that historically made loans through mortgage brokers, including Cleveland-based National City Bank and New York-based Chase, have stopped the practice, swinging the pendulum from brokers back to traditional lenders, Cutillo asserted.

Gary Hentschel, president of KeyBank's central Indiana district, shares Cutillo's optimism. He brought aboard Bill Davis, a former Regions Bank executive, to lead its mortgage team, and is hiring six lenders.

"[Consumers] kind of connect a bank with security," Hentschel said, "and we are looking to take advantage of that."

Diversifying business

Still, some brokers, such as Signature Group, are weathering the storm and performing pretty well. Dwayne Thompson, Signature's president and sole shareholder, founded the firm in 2003. As an industry veteran who had developed a large book of business at a previous employer, he thought it made more sense to keep that for himself.

As a new player, Signature realized phenomenal growth of 400 percent from 2004 to 2005. It since dipped to 7 percent in 2006 and just 3 percent last year. Yet, when competitors are contracting amid the tumult, Thompson is pleased with the results.

Until early 2007, borrowers with credit scores in the low 600s could qualify for mortgages with no down payments. That portion of his clientele is now gone, as a score below 680 now can trigger higher interest rates and fees.

"If you take 20 percent away from business, that's going to leave a mark," Thompson said. "We're feeling that, but we're definitely making our ends meet."

The bulk of his business is referralbased from builders, real-estate agents and existing customers, making a marketing budget unnecessary. That allows him to pay higher commissions to attract veterans of the mortgage and real estate sectors who bring their own business. In addition, his clientele has an average credit score of 744, he said.

In November 2006, he added a real estate division that now accounts for roughly 10 percent of Signature's revenue. He is a lender of second mortgages as well. Refinancing makes up 65 percent of business, which he admitted is a little high.

Thompson undertook plans to build a 4,500-square-foot office near Interstate 69 and 96th Street before the market went south. Yet, he thinks the investment will serve the firm well once conditions improve. He recently hired three brokers, one who also is a licensed real estate agent, to help build that division.

Rates still attractive

Perhaps the biggest shot to the credit market is not anything the players have done, but what they'll receive from the Federal Reserve. It recently decided to inject $200 billion into the market, which should mean plenty of money will be available for borrowers, along with lower interest rates.

But rates on 30-year mortgages have been on the rise lately. Freddie Mac reported March 13 that 30-year fixed-rate mortgages averaged 6.13 percent, up from 6.03 percent the previous week. The increase marked the sixth straight week 30-year mortgages were above 6 percent.

Even with the increase, housing analysts said mortgage rates are near historic lows and remain attractive enough to help the housing industry emerge from its slump.

To protect against a future credit crunch, the Bush administration is floating a plan that calls on states to issue nationwide licensing standards for mortgage brokers. The plan also would require lenders to make more complete disclosures about payment terms to home buyers.

Cutillo at Stonegate sees no problem with the proposal, blaming the industry for the havoc that has resulted.

"We caused our demise by creating products that were like unsecured credit cards," he said. "We thought we could make it up with higher interest rates, but it artificially fueled the real estate market."

Still, industry veterans say current conditions pale in comparison to what occurred during the economic hardships of the 1980s under President Carter when average 30-year mortgage rates hit highs of more than 18 percent.
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