REQUIRED READING: In March, industry veteran David Hall announced that he had opened a de novo mortgage banking company in Michigan. For some people, this might represent a sterling example of being in the wrong place at the wrong time. Even Hall admits the oddness of starting his new Hall Financial mortgage business in the midst of a recession in one of the worst-hit states.
‘As with any business, it may not be timed perfectly,’ he admits. ‘But we're looking at it as a long-haul business.’
Since the economic crisis began, a record number of financial institutions have been shut down, and many of the companies that are still in business have seen substantial losses brought about, in large part, by failures in the residential mortgage market. Yet at the same time, there is a small but determined stream of new financial institutions that have opened their doors and dared to enter the residential mortgage market. Whether these entrepreneurs are daring business leaders or deranged masochists remains to be seen – and the de novo bankers themselves realize the significance of their unusual situations.
‘Our initial growth plan was flawed, based on what happened in the economy,’ says Robert E. Hahn, president and CEO of Community Valley Bank in El Centro, Calif., which opened in October 2007. ‘Instead of becoming a $75 million bank, we are a $50 million bank. We're doing okay, and we're growing every quarter, but we're behind our plan.’
‘We've had a bunch of those 'What was I thinking?' moments – and it got worse and worse and worse,’ says Ken LaRoe, founder and CEO of Eustis, Fla.-based First Green Bank.
LaRoe began the bank-organization process in September 2007 and was literally the last in line. ‘We received the last bank charter granted in Florida,’ he adds.
In concept, LaRoe's actions seemed to fly in the face of logic: The Florida market was particularly hard hit in the housing crisis, yet LaRoe decided to include residential mortgages as part of his product lineup. But LaRoe's efforts paid off, and the bank currently has $100 million in assets.
‘We just hung on and raised $17.2 million and got open,’ he continues. ‘We opened in February 2009 and became profitable by August 2010, which is unprecedented for a start-up bank. ‘We talked to our shareholders today, and they are pleased with our decision to go forward.’
Worth the bother?
From a business development standpoint, LaRoe's results confirm that de novo success can be achieved in today's economic climate. Still, it is a very difficult market to enter.
‘Balance sheets are so risky that you have wonder, where are you going to raise capital?’ says Dr. Gregory Price, chairman of the Department of Economics at Morehouse College in Atlanta. ‘As for housing, you need to figure out how to get value out of the excess supply of homes that are now on the market.’
Scott Stern, CEO of St. Louis-based Lenders One Mortgage Cooperative and chairman of the Community Mortgage Lenders of America, adds that other entities are equally skeptical about giving a thumbs-up to a start-up.
‘It is hard to get state licenses, agency approval and investor approval,’ he says.
Joe Brannen, executive director of the Georgia Bankers Association, points out that there is no great governmental enthusiasm in welcoming new lenders to the market.
‘State and federal regulators are very cautious about approving new charters,’ he says. ‘They are looking at a number of existing banks, and those banks need to be healthy or return to health before allowing more banks to come in.’
One might surmise that with the number of failed financial institutions, it would be easier to pick up one of those entities rather than start from scratch. But that's easier said than done.
‘A lot of guys are trying to do that,’ observes C.M. ‘Corky’ Watts, principal at Garrett, Watts & Co., based in Berkeley, Calif. ‘We've heard that you get down to the altar, but after six to eight months, the Federal Deposit Insurance Corp. (FDIC) says no, or something turns up that prevents it from happening. A lot of banks are in trouble now, and the FDIC has its hands full. There is a lot of walking dead – banks with a lot of issues – but if they closed them all down, we'd have a lot more problems.’
Thus, anyone who is eager to get a new foothold in the industry would find it easier to stake a new claim.
‘There are management teams that want to get a fresh start,’ Stern says. ‘They are breaking away from companies with legacy issues. We're seeing these certain management teams go out and start de novo banks.’
Still, there is no such thing as a permanent recession, and many financial services experts believe getting started now could make good business sense.
‘If you take the point of view that we'll come out of the recession in a year or two, it is not bad to think about doing this,’ comments Andrew DeJoseph, professor of economics at Nassau Community College in Garden City, N.Y.
Hall says he is buoyed by the absence of other competitors, both new and well established.
‘A lot of people are getting out while we're getting in,’ he says. ‘That is an advantage, instead of getting in when everyone else is getting in.’
Thomas Pinkowish, president of Community Lending Associates in Essex, Conn., notes that many institutions in the new wave of start-ups benefit from having old hands that can quickly make a fresh start.
‘When you bring in someone with experience and connections, they already have existing business relations with lists of different vendors, Realtors and other people in the business,’ he says. ‘They're reconnecting from a different angle.’
Hall concurs. ‘Ninety percent of our business comes from referrals: Realtors, past clients, attorneys, people I know and the other guys in my company know,’ he says.
But can a de novo literally start on a clean slate and find success in today's rough market? Indeed, a number of the de novo institutions are filling distinctive niches: economically troubled markets that were especially hard hit in the recession.
‘We are in the state at the epicenter of the meltdown,’ says LaRoe. ‘But we have no past dues, no toxic assets, no bad anything – we can loan money to the extent that the FDIC will allow. And being one of the few banks in lending in Florida, the business opportunities are phenomenal.’
Likewise, Hall Financial's focus on Michigan is being promoted by its founder as a prescient business decision.
‘We see the purchasing business increasing here,’ says Hall. ‘The general sentiment is that we've hit bottom, and hopefully, the economy will start to move.’
Another de novo institution is Start Community Bank, which is focusing on the market in and around New Haven, Conn. Although the bank is still in the formation period – it has a temporary state charter and is awaiting FDIC approval – it is preparing to seek out customers.
‘Our tagline is, 'On your block, in your corner,'’ says William Placke, president. ‘We're here, and all of our decision-making is here. We have a better understanding of the local market. My sense is that most big banks have underwriting in some far-off place, and they never talk to potential customers. We intend to do a great deal of listening.’
While Placke's new bank will include residential lending, it is somewhat different in that it follows the traditional goal of community development financial institutions.
‘Our mission is to serve unbanked and underbanked people in economic stress within New Haven and the surrounding areas,’ he says. ‘We also have a program that gives attention to people staying close to where they work – police officers, healthcare workers and others seeking to buy homes near their work.’
But Placke firmly insists that his bank should not be confused with a charitable organization.
‘We are not going to be a court of last resort,’ he states. ‘We will have vigorous underwriting standards, just as anyone else. But we want to help figure out a correct situation for people – our stake will help them get to 'Yes!'’
However, not every de novo bank is rooted in a problematic territory. R Bank, which opened in June 2009, is located in Williamson County, Texas. According to President and CEO Steve Stapp, the local economy is doing well – the county's largest employer is Dell – but the lack of local lenders encouraged him to pursue this opportunity.
‘For the market we're in, we felt there was a void from a community bank standpoint,’ he explains. ‘There was no local-owned bank in our market, and we felt the need to come in and make that work.’
Because the de novo institutions are community-level entities, it is easier for them to establish person-to-person contacts in their markets.
‘Our process is old-school,’ says Bryan Bartman, vice president of residential mortgage lending at WPS Bank, based in Madison, Wis. ‘We've reached out to people at WPS Insurance – our parent company – and the surrounding community. We've held events such as large tents, lunches and barbecues. We have a very traditional approach, and we are still working that mantra.’
Bartman adds that a big selling point with the bank's mortgage customers is the assurance that it was not tainted with the residue of the economic crisis.
‘We didn't have to deal with fallout of crazy decisions of the past,’ he says. ‘We had no bad loans, because we had no loans.’
But while the de novo institutions don't have to deal with the legacy issues that many of their older competitors face, they are still facing the industry-wide consequences of the post-meltdown era.
‘This is a completely brave new world,’ says LaRoe. ‘Underwriting standards changed dramatically. We are doing twice the work to get half as many deals approved.’
For Stapp, the regulatory climate has also slowed down the business process dramatically.
‘Anything that we want to do or change in our business has to be approved by the FDIC,’ he says. ‘We submit our request to their regional office, and they send it to Washington. Timing is very important for making business decisions, but there is no telling when you'll get an answer on a proposal.’
In view of these challenges, some de novo institutions would rather take a wait-and-see approach on home loans before going deep into those waters.
‘I don't see us doing that – at least over the next three years,’ says Community Valley Bank's Hahn, noting that his lending focus is now exclusively on the commercial sector. ‘There is still an awful lot of overhang of short sales and foreclosures.’