Owing to a post-war economic boom and an auto industry entering its glory days, Michigan’s housing market was vibrant in the mid-20th century, with a home ownership rate in 1960 of 74.4 percent, compared to the national rate of 61.9 percent. The relative wealth of the region created demand for home loans, which banks and savings and loans institutions were only too happy to serve. Today, Michigan still enjoys higher home ownership — 74.8 percent versus 65.4 percent nationally, according to the Mortgage Bankers Association — and many experts believe the rate will go higher.
“Historically, the Detroit area has been a hotbed of activity for mortgage companies. The area was capital-rich largely because of the auto industry, which at the same time spawned a growing need for housing for factory workers,” says Matt Kerin, executive vice president of Troy-based Flagstar Bank and president of its mortgage banking division. “We had … Standard Federal, Great Lakes Federal, National Bank of Detroit, and independent mortgage companies like Manufacturers Hanover, Washtenaw Mortgage, James T. Barnes, and Advance.”
Kerin says that as local life insurance companies such as Jackson National Life and Lincoln Financial began to invest in mortgages, the number of professionals grew and southeast Michigan maintained its role as a center of lending expertise.
“Even as there was consolidation in the industry, the Michiganders who worked in mortgage banking tended to want to stay here,” Kerin says. “The price of running a mortgage shop here is affordable, and there’s a mother lode of talent.” Today, Michigan is home to 600 nondepository institutions, 136 banks are chartered here, and all of them offer some mortgage products, says Murray Brown, legislative consultant for the Michigan Mortgage Lenders Association, which represents the mortgage industry in legislative and regulatory issues.
The 1980s, saw the dawn of the era of large consumer-oriented residential mortgage companies, bringing with it names like Andy Jacob (World Wide Financial), Dan Gilbert (Rock Financial), and Jeff Ishbia (Shore Mortgage). “Two phenomena made this new business model possible,” says John Moore, associate professor in the finance and economics department at Walsh College in Troy. “No. 1 is the fact that starting in the middle 1980s, you had asset-based securities trading in capital markets. Also, by then Wall Street had the technology to start (processing) these trades quickly. Without the technology, it’s unlikely that the mortgage market would have developed the way it did. It’s a case of entrepreneurship. All of a sudden there’s a change in capabilities and a few people saw the possibilities, took some risk, and they were successful.”
Although many financial institutions have disappeared — Standard Federal was acquired by LaSalle Bank/ABN Amro, which was later sold to Bank of America, and World Wide Financial was shut down by regulators in 2006 — other companies, like Detroit-based Quicken Loans Inc. (formerly Rock Financial), Flagstar Bank, and United Shore Financial Services in Troy, the parent company of Shore Mortgage, United Wholesale Mortgage, and Capital Mortgage Funding, have made sure that the region stays on the map.
Quicken Loans, arguably the region’s most well-known residential lender due to Founder and Chairman Dan Gilbert’s role as a major downtown developer, posted a record $70 billion in total nationwide loan volume in 2012, up considerably from 2011 — also a record year, with $30 billion. Flagstar Bank’s total loan volume more than doubled in 2012, to $53.6 billion.
According to 2012 results compiled by Mortgagestats.com, Quicken Loans was the nation’s fifth-largest residential lender, with total loan volume of $69.8 billion, while Flagstar Bank ranked eighth with $53.6 billion. In terms of wholesale loan volume (loans funneled to lenders by third-party mortgage brokers such as banks) in the same period, three of the country’s top 15 lenders are located in southeast Michigan: Flagstar Bank in Troy (No. 3, $14.7 billion), USFS’s United Wholesale Mortgage in Birmingham (No. 7, $6.2 billion), and Cole Taylor Mortgage in Ann Arbor (No. 12, $3.8 billion). Quicken Loans’ “consumer-direct” business model does not use brokers.
This growth is supported by figures that suggests the real estate and mortgage industries are emerging from the dark days of the recession. The National Association of Home Builders expects total U.S. housing starts to hit 970,000 by the end of the year, up 24 percent from 2012. The National Association of Realtors predicts that total existing-home sales will inch up by 6.5 percent to 7 percent over 2012 sales, to nearly 5 million transactions by the end of the year. Although industry statistics show the number of new and existing homes sold in Michigan in the first quarter of 2013 increased by only 0.09 percent year-on-year, to 26,526, there are bright spots.
“The market has really built up in the last 12 to 18 months,” says Randy Wertheimer, president and CEO of Hunter Pasteur Homes in Farmington Hills, which has developments in Northville, Ann Arbor, Commerce Township, Lake Orion, and South Lyon. “We sold 60 homes in 2011, 93 in 2012, and we’ve sold more than 50 through April of this year.” Wertheimer says the lack of new and existing inventory is nudging prices up. “We’ve raised our prices $20,000 to $30,000 since last year,” he says. “We may not have raised them high enough.” The builder’s homes are listed from $250,000 to $600,000.
While Quicken Loans revolutionized the industry with online mortgage originations, USFS has also seen remarkable growth driven by innovation. The privately held firm saw its residential loan volume dramatically increase to $7.2 billion last year from $1.7 billion in 2011. It is forecasting $16 billion in volume this year.
“There are a lot of lenders in the industry, probably north of 40,000, and when you can see success from lenders in the state of Michigan and in and around Detroit, I think it’s great for the state,” Quicken CEO Bill Emerson says.
Jeff Ishbia, an attorney and entrepreneur who saw an opportunity to provide government-backed FHA loans to first-time homebuyers who were not eligible for traditional financing, started Shore Mortgage in 1986. For the next 20 years, Shore took a conservative path and found a welcome niche serving like-minded customers.
When the sub-prime market took off in the early 2000s, Ishbia was wary, says his son, Mat Ishbia, who joined the company in 2003 and is now president. “My father never felt comfortable that those people should be getting the rates and the deals that they were, so he never went into sub-prime (lending), although his FHA business slowed as borrowers were lured into sub-prime products. When the crash came, all the mortgage lenders started to have to deal with bad loans, but Shore really didn’t have any legacy issues. Faced with competitors going out of business and a tougher regulatory environment, he saw an opportunity: Bring in a new team to take advantage of the changes in the market and play offense.”
By 2006, Mat Ishbia was beginning to influence his father’s strategy — keep a presence in FHA loans because they were good at it, but also move toward the conventional mortgage market because that’s where the big dollars are. Mat Ishbia’s vision was to be as innovative as Gilbert, but to apply that creative energy to the overlooked channel of mortgage brokers. The company had formed its United Wholesale Mortgage unit in 2001 with a relatively small footprint in the market, but Mat Ishbia proposed taking the process to the next level by replacing account executives with an in-house staff and a sophisticated customer relationship management system to connect with brokers.
In 2011, he recruited Kip Kirkpatrick to be United’s CEO. “I came in and the (strategy) was, How do we recruit a management team and build something really big around Mat’s wholesale idea?” Kirkpatrick says. “This area is full of mortgage talent. Everyone had the same common interest, which was how to build this next-generation mortgage banking firm. We decided we wanted to build a manufacturing facility that could take a loan no matter where it came from and do all the underwriting in a best-in-class way, document everything, be in complete compliance, and have it come out the other end where the client is very happy and we don’t have any risk.”
Today, after investing in technology, consolidating its operations in a single facility, increasing employment (the goal is to have an estimated 1,700 workers by 2014 from 400 in 2011), and embracing process improvement tools such as Six Sigma and lean manufacturing, USFS has built up a nationwide network of 4,000 broker-partners and processes 5,000 loans per month. “We train our people and (we have) developed a very sophisticated sales force so the broker doesn’t have to keep up with all the changes in the industry,” Kirkpatrick says. “They can focus on getting new customers because they know they can trust us to deliver.”
The company’s Shore Mortgage and Capital Mortgage Funding brands offer online and “walk-in” services, respectively, while United Wholesale Mortgage, which was Mat Ishbia’s vision, today accounts for 90 percent of the business. Where Shore Mortgage once was strictly FHA, 75 percent of USFS’s business today comprises conventional loans.
At Ross Mortgage Corp. in Royal Oak, which has 150 employees in Michigan, Indiana, Ohio, Kentucky, and Florida, loan volume increased to $504 million in 2012, up from $477 million the year before. President and CEO Tim Ross says southeast Michigan’s strong standing as a mortgage hub should continue.
“As long as the auto industry is our central driving economic force (and we have) the ability to attract others based on favorable tax policies, we definitely have the potential to continue to be a great state for housing and housing finance,” he says.
Cole Taylor Mortgage in Ann Arbor, which was formed in 2010, has established 25 retail branches in 12 states and serves 42,000 customers. The company originated $5.2 billion in loans in 2012 and $1.9 billion in the first quarter of 2013. President Willie Newman says metro Detroit’s mortgage industry shares the region’s industrial psyche. “My hypothesis has been if you look at how mortgages are done, it’s sort of a manufacturing process,” he says. “Whether it’s a financial service or an automobile, there’s an assembly process associated with it and it’s very important to manage that process effectively and efficiently.”
Going forward, the sub-prime crisis is a constant reminder of the value of discipline just as a complex world of regulations spawned by the crisis stretches ahead. Among provisions in the Dodd-Frank legislation — signed into law in 2010 — is a pending risk retention rule that would require mortgage lenders to retain at least a 5 percent interest in a mortgage loan that is sold in the secondary market, unless that loan meets the terms of a “qualified residential mortgage,” which is undefined.
“Dodd-Frank is a very comprehensive bill and there are a lot of rules that have to be implemented,” Emerson, of Quicken Loans, says. “Some of the regulation is actually a good thing. We certainly don’t want to return to the market that we were in (before), and I think that will prevent that from happening. That said, there would certainly be unintended consequences related to the bill and the Consumer Financial Protection Bureau. I think it’s certainly a possibility that some of these smaller companies are going to actually be too small to comply. Hopefully the CFPB will take a balanced approach on how this stuff needs to be implemented. I think competition in our market is good; having small, medium, and large lenders is very important to the consumer. I hope we’ll be able to figure this out.” db