Monthly Archives: June 2018

Secrets of Quicken Mortgage Loans Success

Quicken Loans recently overtook embattled Wells Fargo to become the leading direct-to-consumer mortgage lender in the nation.

It is the first time a Detroit-based firm has ever held that title.

Yet being No. 1 in mortgages is a lot different than being tops in other industries, such as automotive. In the highly fragmented mortgage sector, where prospective borrowers can visit some 30,000 bank branches and credit unions across the country for a home loan, Quicken commands a market share of just 5.4 percent.

“Every time we start to get a big head, I remind our people, ‘You know that 19 out of 20 people who wake up this morning and get a home loan aren’t coming here?’ ” Dan Gilbert, 56, Quicken’s founder and chairman, said in a one-on-one interview in the firm’s bright downtown headquarters with windows facing the Renaissance Center and the Detroit River. “We’ve got a long ways to go.”

Gilbert said he thinks Quicken can grow to 10 percent of the market — perhaps even 20 percent or more. The key, he said, is to keep improving Quicken’s edge in technology and customer service.

“That’ll take time,” Gilbert said from his 10th floor office in One Campus Martius, previously known as the Compuware building, in Detroit. “But we have the platform and infrastructure in place to do that. We really think we do.”

Such a feat is rare and hard to achieve. Few lenders ever capture more than 10 percent of the retail mortgage market, a category that excludes loans made through brokers, according to Guy Cecala, CEO and publisher of Inside Mortgage Finance, which produces closely followed lender rankings.

Wells Fargo, in fact, still holds the top ranking for mortgage originations in a broader category that includes loans from brokers and those bought from other lenders.

“It is a lot more of a challenge if you are an online or direct-to-consumer lender like Quicken,” Cecala said. “They are going to need to keep up the advertising, they are going to need to be a lender of choice.”

Major employers are important in any city. However, Quicken’s success has had an outsize impact on Detroit, which is  recovering from decades of disinvestment and a 2013-14 municipal bankruptcy.

If Gilbert’s mortgage machine ever sputters out, so could the city’s rebound.

Quicken says it employs nearly 13,000 people in Detroit, making it one of the city’s largest employers. The mortgage firm accounts for close to three-quarters of the total head count in Detroit for all businesses within Gilbert’s family of companies.

Those businesses number more than 100 and range from real estate firm Bedrock to StockX, an online stock market for sneakers, sports apparel and other goods. Gilbert’s real estate holdings include more than 100 buildings and new development projects in and around downtown.

Quicken, though, “is still the absolute flagship, most important business — most people, most revenue, most profit,” Gilbert said.

Don’t say ‘nonbank’

Many in the financial industry now classify Quicken as a so-called “nonbank.” That distinguishes the firm from traditional banks that take deposits, offer checking accounts and have ATM machines.

Gilbert absolutely hates the term.

He feels that “nonbank” gives the wrong impression of Quicken’s business model — and the quality of the $20.4 billion in residential mortgages it originated in the first quarter — as being riskier. Mostly, he thinks it strange to define Quicken by something it is not.

“You know, I’m a non-zebra talking right now — it’s just the weirdest thing,” Gilbert said. “In what other category in the world is someone a non-something? It’s an irrelevant term for both bank and nonbank as it refers to mortgages.”

Quicken is the first nonbank to become the top retail mortgage lender since the 2008 financial crisis.

Gilbert says Quicken has achieved its success through an obsessive focus on customer service, a company culture centered on constant improvement, and the innovative online selling and processing of “very vanilla” mortgages — none of the free-wheeling loan products that led to last decade’s market meltdown.

About 95 percent of all Quicken’s mortgages have explicit government backing through Fannie Mae, Freddie Mac, Ginnie Mae or the Federal Housing Administration, which generally insure loans against homeowner defaults.

Most of Quicken’s other loans are so-called jumbo mortgages, Gilbert said, which are those above $453,100 in value (or $679,650 in higher-cost regions) and therefore aren’t eligible for government backing.

Defending the title

How long Quicken can stay No. 1 could depend on its adjustment to the mortgage industry’s shift away from mortgage refinancings. The number of refinancings has been plummeting nationwide as interest rates inch up.

The shift also has resulted in lower mortgage origination volume across the industry.

The Mortgage Bankers Association forecast that refinancings will fall another 30 percent this year, following a 33 percent year-over-year drop in 2017. The rate on a 30-year, fixed-rate mortgage was 4.56 percent Thursday, up from 3.94 percent a year ago, according to Freddie Mac.

Quicken’s strong first-quarter results, achieved in a purchase-oriented mortgage market, suggest that it is making the transition.

“They managed to thrive in a home purchase market, which would suggest (the refinancings fade) is not an issue,” Cecala said. “But it will be easier to tell after 2018 is in the record book.”

Quicken also has gotten more involved in the business of servicing mortgages, which generates revenue for the firm. Servicing involves collecting payments from homeowners on behalf of the owners or investors in the mortgage.

“They are the seventh largest servicer in the country now and that is phenomenal given that they really weren’t servicing loans six years ago,” Cecala said.

Gilbert said Quicken has no plans to loosen its lending standards to compensate for lost refinancing business.

“We won’t,” he said. “Our reputation is not worth any short-term money that you might make from that.”

No subprime

Gilbert has long insisted that Quicken did not partake in the subprime mortgage boom that culminated in last decade’s market crash. He points to the company’s survival through that era when numerous lenders, such as No. 1-ranked Countrywide Financial, disappeared.

“That’s why we’re alive,” he said.

He recalled the significant industry pressure at the time to extend loans to unqualified borrowers.

“I remember our guys bringing us stuff, our guys being our bankers, saying, ‘Hey look, Countrywide is offering 100% loan-to-value loans for 580 (credit) score borrowers with no income verification. I said, ‘We’re not doing these loans,’ ” Gilbert said.

“You have to look at it through the eyes of ‘would you loan your money.’ That’s how I ask people to look at it,” he added. “Because even if you could make some money in the short term and sell (the mortgage) off, we still have reps and warranties that we make, by the way, to whoever we sell to. And secondly, it’s not the right thing for the customer.”

More recently, Quicken has been battling the U.S. Department of Justice in federal court in a False Claims Act case alleging that, from 2007 through 2011, the firm fraudulently approved borrowers for Federal Housing Administration-backed mortgages.

Gilbert has strongly denied the allegations and, unlike other lenders, has refused to settle the case with a big payout to the government. A trial on the merits of the government’s claims isn’t expected to start until mid-2019 at the earliest.

Quicken continues to participate in the FHA mortgage program. Other lenders have scaled back or stopped doing FHA loans in recent years.

“The problem in this country is, if you’re going to treat the bad guys the same as the good guys, you’re not going to have a lot of good guys left,” Gilbert said earlier this year.

Rock to Rocket

Gilbert started Quicken Loans, then known as Rock Mortgage, in 1985 with his brother and a friend. Back then, business involved “bringing doughnuts into real estate offices and hoping they give you a referral,” he said.

Quicken became one of the first online mortgage lenders in the late 1990s and started shuttering its brick-and-mortar branches.

 More recently, through its new Rocket Mortgage mobile and online brand, the firm has shortened the time to closing a mortgage to as few as 16 days for a purchase and eight days for refinancing.

Quicken has won eight consecutive annual J.D. Power awards for client service in mortgage origination and four for mortgage servicing.

Out of suburbia

The start of Detroit’s rebound can be traced to Gilbert’s decision a decade ago to move Quicken’s headquarters from the suburbs and into downtown, bringing thousands of young employees.

Gilbert said he doesn’t consider the Detroit move as any sort of charitable act. Had Quicken stuck to the suburbs, today its workforce might be inconveniently spread across multiple buildings, separated 5 or 6 miles apart.

“There is no way we would be the company we are today spread out in the suburbs,” he said. “It’s been very profitable for us to be a business in the city.”

How it works

Unlike traditional banks, Quicken can’t rely on a base of customer deposits to make mortgages. Instead, it can either borrow the money for the loans from banks, tap lines of credit or use its own cash, Gilbert said.

“We carry quite a bit on our balance sheet,” he said.

Quicken runs the majority of the mortgages through the underwriting systems for the government-backed entities such as Fannie Mae. It then pools the mortgages and bundles them into securities, which Quicken goes on to sell into the secondary market.

It is common for all mortgage lenders — banks and nonbanks — to process and sell their mortgages that way.

Some market observers have raised concerns about the possible risks and dangers of nonbank mortgage lenders, contending that such firms are vulnerable to sudden dry-ups in their short-term credit lines.

Gilbert insists that Quicken is well-capitalized and less risky than many banks.

“We have more assets than 94 percent of FDIC-insured banks,” he said.

Moody’s Investors Services upgraded Quicken’s bond rating by a step in December, saying that “while profitability has declined from the exceptional levels of 2015 and 2016, we expect the company to continue to generate very strong profitability over the next several years.”

Gilbert also disputes claims that nonbanks are under-regulated. He says Quicken is actually more closely regulated than many traditional banks because it is overseen by regulators in all the 50 states where it makes mortgages, plus by government agencies including the Consumer Financial Protection Bureau and the government-backed mortgage entities.

Cecala of Inside Mortgage Finance said that few in the industry are worried about Quicken.

“Despite those general concerns about nonbanks, most people don’t have the concern about Quicken, just by their sheer size,” he said. “They are the largest nonbank by far, and even though they are privately held, everyone knows that they certainly have the wherewithal to make good on anything they need to.”


Have Housing Prices Peaked ? Here is the Latest

The early stages of a housing bubble are fun for pretty much everyone. Homeowners see their equity start to rise and feel smart for having bought; home seekers have to pay up, but not too much, and fully expect their new home to keep appreciating. People with modest incomes feel a bit of pinch but can still afford to stick around.

But later on, the bad starts to outweigh the good. Existing homeowners still enjoy the ride, but would-be buyers find themselves priced out of their top-choice neighborhoods. And residents who aren’t tech millionaires find that they can no longer afford to live where they work. Consider the plight of a teacher or cop pretty much anywhere in California these days:

Drew Barclay has a master’s degree in education and three years of experience as an English teacher, but, like most new teachers in Davis, he can’t afford to live there.

Instead, Barclay, 31, shares a rental in Sacramento that costs him $950 a month – about 40 percent of the $2,550 he brings home each month after taxes.

He is so certain that he won’t be able to qualify for a loan for a home in Davis on his $47,000 annual salary that he hasn’t bothered to house hunt. The median price for a house in the city in March was $682,500, according to tracking firm CoreLogic. Renting also is prohibitive, with the average rent in Davis about $2,500 a month, according to Zillow, a real estate website.

Davis Joint Unified officials hope to get a little help from state legislators. Last week, the state Senate voted 24-8 to waive the annual school district parcel tax of $620 for teachers and other employees of the Yolo County school district.

Davis school board member Alan Fernandes said that about two-thirds of the district’s teachers live outside Davis where housing is less expensive. He said the bill would encourage more of the district’s teachers to live in the community they serve.

Davis Joint Unified regularly passes parcel taxes to keep class sizes down and to support classroom programs. In 2016, 71 percent of Davis voters approved Measure H, a yearly tax of $620 on each parcel of taxable real property in the district for eight years. The measure raises $9.5 million a year to support math, reading and science programs and reduced class sizes for elementary grades.

But the roughly $50 a month exemption isn’t likely to help Davis Joint Unified teachers enough to make buying a house affordable. The teachers are some of the lowest-paid educators in the region, with some of the highest health care costs.

Barclay said he knows teachers 10 or 15 years older than he is who are renting rooms in other educators’ homes to get by. He said some teachers have weekend jobs to make enough money to pay their bills.

“Because I’m fairly certain I can’t put down permanent roots here, I don’t see this position as a permanent one,” Barclay said of his job as an English teacher at Davis Senior High School.

California school districts have responded by offering signing bonuses, housing stipends, computers and free tuition to educators who sign up with their districts.


AML / BSA for Mortgage Lenders – Are You Compliant ?

BLOG VIEW: The U.S. Department of the Treasury, through the Financial Crimes Enforcement Network (FinCEN), issued a final rule in February 2012 requiring nonbank residential mortgage lenders and originators to establish anti-money laundering (AML) programs and to report suspicious activities under the Bank Secrecy Act (BSA). The BSA is designed to alert law enforcement of criminal and terrorist activity. The BSA requires U.S. financial institutions (including non-bank residential mortgage lenders/brokers) to assist U.S. government agencies in detecting and preventing money laundering.

Despite the issuance of this final rule more than six years ago, many nonbank mortgage lenders/brokers are not complying with the requirements of the BSA and, as a result, regulators are beginning to take note in their examinations.

A compliant AML program for a residential mortgage lender/broker includes: 1) designating a competent individual to serve as the company’s BSA/AML compliance officer; 2) conducting an AML Risk Assessment; 3) drafting and implementing written internal policies and procedures; 4) establishing an ongoing training program; and 5) conducting an independent audit of the company’s AML program every 12 to 18 months. An AML program must also include the maintenance of a “red flags” program and a customer identification program, the filing of suspicious activity reports (SARs), when required, and compliance with Section 314 of the U.S. Patriot Act and Office of Foreign Assets Control (OFAC) regulations.

Most mortgage companies have designated a BSA/AML compliance officer and have an AML policy and procedure in place; however, many mortgage companies do not comply with one or more of the other AML requirements.

For example, more often than not, mortgage companies are not conducting an AML risk assessment. This needs to be completed at least every 12 to 18 months, and lenders should be modifying identified activities based on the company’s operations and growth. The risk assessment should consider the current and future state of items such as the company’s size, products, customer base and geographic area of operation. The Conference for State Bank Supervisors (CSBS) has issued a tool to assist mortgage companies in completing such risk assessments. This tool can be found at

Another BSA requirement that is frequently lacking or unfulfilled is ongoing training. Mortgage companies must train their personnel at least annually in all applicable aspects of AML regulations. A best practice for lenders is to provide AML training to all new employees within 30 days of hire.

Additionally, the BSA/AML compliance officer must receive periodic training that is relevant and appropriate given changes to regulatory requirements, as well as the activities and overall AML risk profile of the company. All AML training needs to be adequately tailored to a company’s operations. For example, mortgage companies should specifically train their personnel on the types of suspicious activity and “red flags” they are likely to come across, such as mortgage fraud related items.

Finally, mortgage companies must document their training programs by maintaining training and testing materials, the dates of training sessions and attendance records. Lenders that are not conducting this annual training should immediately do so, and there are a host of vendors that can assist in providing AML training and tracking tools at a fairly reasonable cost.

Another aspect lenders seem to be overlooking is independent testing/audits. Although the specific nature of the testing will be somewhat dependent on the company’s size and risk profile, the AML audit can be performed by an independent third party or an employee of the company, provided the employee has no role whatsoever in the AML functions being tested (including reporting to the BSA/AML officer), and possesses enough knowledge of BSA regulations to be qualified to perform the audit.

By far, the area of most noncompliance by mortgage companies pertaining to AML requirements is with regard to the filing of SARs. FinCEN highlights the importance of SAR filing by mortgage companies indicating that mortgage companies are the, “primary providers of mortgage finance … and are in a unique position to assess and identify money laundering risks and fraud.”

The BSA lists several situations where a mortgage company must file a SAR. A SAR requires basic company information, information about the individuals involved and information about the suspicious activity or transaction. FinCEN requires all filings to be submitted electronically through its website.

Many mortgage companies take the view that transactions are only reportable only if they involve currency. Not only is this view incorrect, it’s also quite risky. While many of the requirements for the filing of a SAR involve currency, there is also a requirement for a transaction to be reported if a mortgage company knows, suspects or has reason to suspect that a transaction involves the use of the loan or company to facilitate criminal activity.

Given this, mortgage companies must file a SAR every time they suspect fraud – whether it is income, employment, occupancy or some other type of fraud. If a mortgage company has not filed any SARs, or only a few, in the past six years, it could be a sign that the company does not have a compliant AML program or a weak one for that matter.

As such, it is not uncommon for an examiner to ask to review any adverse action notices for the past several years or to speak with the underwriting department to discuss whether they have denied any transactions for suspected or known fraud. In most instances, such fraudulent or suspicious situations are reported to an employee’s manager and not the BSA/AML compliance officer.

It is not surprising that these companies are often the ones that either do not conduct AML training or do not customize their AML training to specifically discuss mortgage fraud, rather than just situations involving large money laundering schemes and currency. Furthermore, it is a best practice for the BSA/AML compliance officer to review all QC reports in an effort to identify any activity that could require the filing of a SAR.

There are many mortgage companies with strong AML programs in place. These companies expend the resources, time and money to ensure they comply with all the BSA requirements. Given the substantial civil and criminal penalties set forth in the statute and the significant increase in state examination questions related to AML items, it is recommended that lenders take a long, hard look at their AML programs and ensure all requirements are properly satisfied.

Michael Barone is executive director of compliance for MQMR, where he oversees all compliance and regulatory guidance with clients and prospective clients.

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