Quicken Loans now third-largest U.S. mortgage lender

06/22/2015

Quicken Loans now third-largest U.S. mortgage lender

DETROIT – June 15, 2015 – At Quicken Loans Arena in downtown Cleveland, a 5,500-square-foot "Humongotron" updates fans on the efforts of LeBron James and his fellow Cavaliers as they try to capture an NBA title.

Across Lake Erie, in Detroit, a smaller digital display in the Quicken Loans Inc. headquarters tracks the firm's quest to reshape the mortgage market.

Both efforts look surprisingly promising, though major tests loom.

Quicken Loans last year extended $59 billion in mortgages, surpassing Bank of America Corp. to become the third-largest mortgage lender in the U.S., according to Inside Mortgage Finance, an industry publication. Unlike its big-bank rivals, the firm achieved its rapid growth without the benefit of a network of branches or ties to local agents, instead relying on technology and aggressive marketing.

The privately held firm, controlled by Cavaliers owner Dan Gilbert, is now making another unconventional – and much bolder – move: suing the U.S. government.

In April, the Justice Department accused Quicken Loans of defrauding taxpayers, charges Quicken denies. The government says the company submitted mortgages for insurance by the Federal Housing Administration (FHA) that it knew, or should have known, were ineligible. Prosecutors say that between 2007 and March 2015, the government paid out over half a billion dollars in insurance claims on defaulted mortgages endorsed by Quicken. Prosecutors didn't specify how many of those claims they allege were linked to fraudulent loans.

"Fraudulent origination activity resulted in significant losses of federal funds and is one of the precise types of conduct that caused the financial crisis and housing market downturn," a Justice Department spokeswoman said in an emailed statement.

In prosecutors' lawsuit, they cited alleged abuses, such as Quicken endorsing a loan from a borrower who requested a refund of the $400 application fee so she could afford to feed her family. She ultimately made only five mortgage payments before defaulting, costing the government about $94,000 in insurance claims.

Quicken Loans disputes the allegations and, before the Justice Department launched its suit, Quicken pre-emptively filed its own, in which it accused the government of trying to illegally pressure the company into a big settlement.

The company said prosecutors cherry-picked 55 FHA-insured loans out of the nearly 250,000 the company closed since 2007, and that its mortgages were projected to provide the government with billions in profits via the insurance premiums such loans generate.

Quicken executives added they are fulfilling the mission of the FHA program by lending to low- and middle-income consumers, an area in which they have picked up market share as banks such as J.P. Morgan Chase & Co. have retreated from the business. The executives added that prosecutors' actions are resulting in fewer lenders making loans to marginal borrowers and first-time homebuyers.

Quicken Loans Chief Executive Bill Emerson says the government's action will have a negative effect on the middle class. "It's mind-boggling to me," he said in an interview.

The stakes are considerable for Quicken: The company has said prosecutors asked for a "nine-figure settlement." Quicken recorded $312 million in net income in the first quarter and $464 million in all of 2014.

The dustup is in many ways uncharacteristic for a firm that considers itself more in sync with Silicon Valley cool than Wall Street bravado.

"We're a technology and marketing company that happens to do mortgages," said Mr. Emerson.

Quicken's offices have all the trappings of a highflying tech startup, including an indoor basketball court and work spaces splashed with blots of bright colors. At employees' desks are larger-than-life likenesses of their faces made by Fathead Inc., a company owned by Mr. Gilbert that makes giant wall decals featuring professional athletes.

On the wall, digital screens post continuous updates throughout the day of indicators such as how many credit reports the company is pulling on potential borrowers. Industry experts say the company's centralized technology systems, including near-real-time tracking of its applications, are the envy of the trade. Even the nation's second-largest mortgage lender, J.P. Morgan, licenses some of the technology that underpins Quicken's systems from its rival.

In tech terms, however, Quicken Loans' roots are ancient. Mr. Gilbert founded the company, then called Rock Financial Corp., in 1985. The mortgage lender was purchased by Intuit Inc., makers of the personal-finance software Quicken, in 1999, and the unit was renamed after Intuit's marquee product. Even though Mr. Gilbert and a group of investors bought the mortgage operation back and took it private in August 2002, it has a perpetual agreement with Intuit – which still distributes Quicken software – to use the Quicken Loans brand. Mr. Gilbert personally owns a little more than three-quarters of Rock Holdings, the parent company of Quicken Loans, and is the sole board member.

The company, which finances the bulk of its operations through credit facilities with major banks, says it has no plans to go public. Quicken also tapped the bond market for the first time in May, raising $1.25 billion in proceeds for itself and Rock Holdings.

Without thousands of mortgage brokers dotting the country, Quicken has turned to heavy spending on television advertisements and promotions to build its brand. About one out of every four dollars the company spent in 2014, or $451 million, went toward marketing efforts, according to a prospectus for a recent Quicken corporate-bond sale. Last year's promotions included paying $3.3 million a year to keep its name emblazoned on the basketball arena in Cleveland and sponsoring a $1 billion prize, along with Berkshire Hathaway Inc. Chief Executive Warren Buffett, for anyone who could accurately predict the outcome of every men's college basketball game in the NCAA tournament.

Consumers can submit mortgage applications either online or by phoning one of the company's five call centers in the U.S. Once received, says Quicken Chief Economist Bob Walters, the applications are sent through the equivalent of an assembly line, with the company carving a handful of traditional roles handled by mortgage professionals into about 85 distinct positions. Mr. Walters said Quicken can double its volume and see only a small increase in the time it takes to turn around loans. The types of loans Quicken makes and the credit profiles of its customers are broadly in line with those at traditional banks.

The system has resonated with consumers. For each of the past five years, the company has won the J.D. Power award for customer satisfaction in the mortgage business. Mr. Emerson said he and other executives have had discussions about offering other types of consumer loans, though any new product would be unlikely before 2016.

The company's gain-on-sale margin – its profit on loans sold to investors – was 3.60 percent in the first quarter, according to the bond prospectus, compared with 2.06 percent at Wells Fargo & Co., the largest U.S. mortgage lender.

Copyright © 2015 The Jerusalem Post Provided by SyndiGate Media Inc. (Syndigate.info).

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