Oak Street tables plans: Fast-growing mortgage firm postpones IPO

February 14, 2005

Oak Street Financial Services Inc., the fast-growing Carmelbased mortgage seller, has called off its initial public offering.

"We still feel we're in a growth phase," said Oak Street spokesman Joe Poulos. "But some things have been scaled back, such as the IPO."

Oak Street filed initial IPO paperwork with the Securities and Exchange Commission last April, outlining plans to raise up to $150 million from investors. But SEC documents show Oak Street withdrew its registration request Feb. 1

One of the state's fastest-growing private companies for the past half decade, Oak Street was formed in 1999. Originating mortgages is its primary business, particularly for folks with checkered credit histories.

Most of Oak Street's business comes from non-conforming loans or mortgages that don't meet the risk standards for purchase by giants Fannie Mae or Freddie Mac. The majority are sold as refinancings.

Formed by a group of former Bank One executives, Oak Street's velocity was fueled by the whitehot housing market and record low interest rates. By 2003, its revenue had reached $76 million, with profit of $17 million. Such spectacular growth led to Oak Street's IPO plan.

But it appears Oak Street's g r ow t h slowed substantially last year. While its IPO was pending, it reported the results of last year's first six months to the SEC. They show revenue of $39 million, which means Oak Street was on pace to build on 2003's sales.

Oak Street's profit was another story. For the first half of 2004, it was just $2 million. Such a precipitous drop in profitability may have cooled investors' interest. At that pace, Oak Street's performance was worse than in 2002, when it booked $6.1 million in profits on revenue of $50 million.

In 2001, Oak Street's first year of profitability, the firm booked $1 million in profit on revenue of $27 million.

Spokesman Poulos, who represents Oak Street through Chicago-based public relations firm Edelman, blamed three factors: the cost of the company's SEC filing, rising interest rates and the mortgage industry's total decrease in sales.

"The equity markets aren't necessarily optimal right now," he said. "The good news is our originations aren't in decline. We don't need to raise the capital to continue operating profitably."

Oak Street's investment bank, Arlington, Va.-based Friedman Billings Ramsey, declined to comment.

Non-conforming loans have always been Oak Street's largest line of business. But the company's SEC filings show that was even more so last year. For the first half of 2004, $818 million of its mortgage originations were in the non-conforming area, or nearly 84 percent. The year before, non-conforming loans made up 71 percent of Oak Street's sales. In 2002, they accounted for 65 percent.

Oak Street also saw sales of jumbo loans, its second-largest product line, shrink. Jumbo loans have principal values that exceed Fannie Mae and Freddie Mac's $300,700 maximum threshold. Oak Street sold $133 million worth in the first half of 2004, or 14 percent of sales. In 2003, it sold $377 million worth, or 23 percent of sales.

Although the entire mortgage market has cooled from its peak, the subprime sector's performance isn't substantially different from other sectors, said James Ballentine, director of community and economic development for the Washington, D.C.-based American Bankers Association.

But the competition has increased substantially.

A decade ago, Ballentine said, far fewer lenders operated in the subprime market. When niche players like Oak Street learned how to more accurately assess the default risk of borrowers with less-thanperfect credit, they were able to charge those borrowers a premium.

Now, increased competition means those premiums have declined. That's good news for borrowers, but it makes business more difficult for lenders like Oak Street.

"The models that have been established in the subprime market are well-tested now," Ballentine said. "It's no longer a new model, as it was 10 years ago."

Oak Street's phenomenal growth may now be in the rearview mirror, but Poulos said the company plans to eventually return to its IPO plans.

He wouldn't specify when.

"At some point in the company's future, the IPO would likely be a key component of our strategy," he said. "For the same reasons we felt it was important when we originally filed."
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