TheMReport — News and strategies for the evolving mortgage marketplace.
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Th e M Rep o RT | 21 cover story By Elaine Pofeldt TEsTEd T hough we are now seven years removed, the aftershocks of the hous- ing crisis can still be felt. In today's changing industry landscape, smaller, independent companies have opportunities like never before. No longer are only the largest banks able to compete for significant market share in the lending space. Instead, a new crop of entrepreneurs are of- fering loan products that are attractive to both home buyers and mortgage origi- nators who have previously been underserved in the marketplace. One such innovator is Evan Stone, founder of Pacific Union Financial, LLC. Founded in 2004, Pacific Union Financial weathered the Great Recession by adapt- ing to the changing marketplace, rather than rallying against it. Though Pacific Union Financial began its life as a retail lender, it has thrived through diversifica- tion. Today, the company offers wholesale, correspondent, retail, and warehouse lending, as well as mortgage servicing, and it serves as a guide for other independent companies looking to fill today's lending gap. The Retreat of the Big Four P re-housing crisis, four big mortgage banks loomed over the rest of the marketplace. However, because these enti- ties—Bank of America, JPMor- gan Chase, Wells Fargo, and CitiMortgage—held the majority of origination share pre-2008, they were hit the hardest by the market downturn, and the rise of subprime-related lawsuits further hurt their balance sheets. In response, corporate strategies changed in the last few years as big banks began to remove themselves from the marketplace. "As some banks retreat from the home-loan market, specialized mortgage companies are stepping in to fill the void," wrote Joe Light in a 2014 Wall Street Journal report. Light, who covers housing and mortgage for the paper, elaborated on the underlying reasons, saying, "Mortgage lending at big banks such as Wells Fargo & Co. and JPMorgan Chase has dropped more quickly than the rest of the industry in the wake of large mortgage-related legal settlements, new banking standards that require lenders to carry more capital, and increased scrutiny from regulators." This shift in power did not go unnoticed. The Rise of Nonbank Lenders I t has been a long journey for Pacific Union Financial since its start in 2004. But early on, founder Evan Stone recognized that smaller, nonbank lenders had greater flexibility to change with the market than larger banks. "People thought I was going to go out of business," Stone says, "and they thought of me as a young cowboy that wasn't properly considering risk." Since then, Stone, 37, has turned Pacific Union Financial, based in Irving, Texas, into one of the top independently owned mortgage lenders in the country. The once tiny company is now a direct lender and servicer with Fannie Mae, Freddie Mac, and Ginnie Mae, and it is on pace to fund $15 billion in mortgage volume this year. Sure, this doesn't rival the numbers the largest banks pull in, but it represents how much the market has changed since 2008 and the opportunities now available for even smaller, non- bank lenders. "Pacific Union has been one of the success stories," says Tim Nguyen, co-founder and CEO of BeSmartee, an online market- place that he dubs "an Expedia for mortgages." "They've grown tremendously in the past 11 years." BeSmartee has never served Pacific Union, but, Nguyen says, "You keep an eye on the clients you wish you had." Success through Adaptation W hen Stone founded Pacific Union Financial, he did it with only two loan officers and one loan processor in a 1,000-square-foot suite in San Francisco. "The office was dirty," Stone jokes. "It was small. It was a true startup. We weren't going to spend one penny for niceties." By the end of 2005, the company had built enough net worth to transition from being a mortgage broker to a mortgage lender. It began lending in 2006, and operating from a new office in Walnut Creek, California, Pacific Union Financial had a staff of 75 employees. Then in 2007, mortgage markets started to unravel. "Securitizations were stopping," he recalls, reliving the stress. "We couldn't get loans funded." Stone, not yet 30, was not sure what to do. "I'd never seen multiple business cycles at this point," he says. "I kept thinking it's got to get better from here." The company lost some money but still had cash reserves from the good years. Things fell apart in the middle of 2008. "I was three payrolls away from being personally and professionally bankrupt," he recalls. "I didn't know whether to take the remaining money I had and go do something else or hope somehow over the next six to eight weeks things changed. I didn't have a penny left to my name. I had a mortgage and wife." As the business got closer and closer to failure, he grasped unsuccessfully for a path out of disaster. "Some days we wouldn't even show up for work," he says. "It was like, 'What's the point? We're just going to get our butts kicked.'" Finally, salvation arrived in the form of an employee named Jake Howard. "These old leads you're making us work, we can't close these," Howard told him, "but the good news is I was on this mortgage broker blog. All these mortgage brokers are posting deals they're having a hard time getting done. We can do a lot of these deals. Would you be okay accepting applications from brokers?" The company started taking applications from mortgage brokers, becoming a wholesale lender. "That turned everything around," Stone says. "We went from being close to closing our doors to being profitable in 2008."