Franklin American Mortgage Company
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American Mortgage Companycontinuing to grow despite a projected industry decline
Bio of CEO,
CEOCFOinterviews: Mr. Crockett, we last spoke in July of 2002, would you like to tell us about the changes that have taken place since then?
Industry wise, we have seen a tremendous boon. We had record volumes for our
industry in 2003, where we saw close to 3.6 trillion dollars in total origination business
in our industry, a record by well over a trillion dollars. We have had a lot of supply
move into the marketplace, which has increased competition in our market. Even though
interest rates are low comparatively speaking, they are at historical lows. There
are only so many people in the marketplace that can refinance and own homes at high
interest rates. I think we have seen a significant slow down in the last
quarter-and-a-half to two quarters, compared to the boom that we faced the latter half of
2002 and the first three quarters of 2003, which is absolutely incredible and a record
production for our industry. So there has been some significant change industry wise since
July of 2002; that is almost to the day that it all began and now we are seeing it
reversed. I think things are still good, but there is a lot of excess supply in the
marketplace because anybody that knew anything about a mortgage decided to get into the
business while it was so plentiful. It will take a while for the excess supply to filter
out to reflect a normal market environment.
Company wise, our Correspondent division is now two-and-a-half years old and has done very well, achieving significant growth. Correspondent did in excess of two-and-a-half billion dollars in total lending as a division in 2003; while as a corporation, we did about five-and-a-half billion, which is remarkable for an eleven-year-old company. Correspondent just finished their second full year of operating, and for them to be that much of our business, is a credit to their leadership and to the people who work in that division. They have given us a real presence in the marketplace in a new sector, and that has helped us continue to grow and add market share.
CEOCFOinterviews: Have you done expansion in that area?
Mr. Crockett: We have expanded a lot in the last couple of years. For us, expansion means hiring field reps to cover new territory. We have moved out to the far west and California. We have recently hired a regional vice president of production for parts of the west excluding California; he will be based in Arizona and will be hiring salespeople to cover that territory for us on the Wholesale side. We are continuing to grow the Midwest, Southwest and Southeast and moving a little bit more toward the Northeast up to Maryland and Virginia. On the Wholesale side, our base clients are mortgage brokers. They will cover anywhere from a major city to two states, depending on the market opportunity. Our account representatives job is to call on brokers to get them to send us their loans.
CEOCFOinterviews: Do these people work exclusively for you?
Mr. Crockett: Our account executives do work exclusively for us; they are W-2 sales people. The brokers do not work directly for us; they broker their loans to many different companies.
CEOCFOinterviews: How many reps do you have in each region?
Mr. Crockett: We have three regional vice presidents/heads of production. We have one in the Midwest who handles the Midwest and Southwest; he is based in Kansas City. We have one based in Nashville here in the home office, and we have one that is based in Phoenix, Arizona. Each one of those three, on the Wholesale piece, has anywhere from ten to twelve account reps underneath them that are covering territories in all of those areas, so that is how the structure works.
CEOCFOinterviews: How do you go about staying ahead of your competition and getting the brokers to work with you?
Mr. Crockett: In
my opinion, there are a few things, which go into being a good mortgage banker on the
Wholesale side. Foremost is service; everyone talks about service in every industry and it
is something that you have to have, but for us, it is a real focus. As bankers, we all, in
a macro sense, are getting our supply of capital from the same places, such as Fannie Mae,
Freddie Mac and Ginnie Mae on the government side. Whomever can execute and operate the
most efficiently is the one who is going to make the money -- not that everyone cant
make money, because they can -- but operating efficiently and achieving economies of scale
are very important to margin.
CEOCFOinterviews: Do you look at acquisitions?
Acquisition in our business is very risky unless you are talking about a very large,
diversified conglomerate financial institution. Mortgage banking is a service business, so
you are not acquiring a lot of assets; you are mostly acquiring people. When you go out
and acquire volume, you are acquiring people. Another asset to be acquired is servicing
and a lot of the consolidation you have seen in our business is on the servicing side.
There is a trend in our industry, in the servicing game, toward six to eight mega-servers
of loans, with everyone else becoming production-oriented like we are. That trend has been
going on for the last five to seven years, and I think it is going to continue. It is a
volume game, and you really have to have a lot of scalability built into your systems in
order to make money in servicing loans. Unless you can be very big into it, it is hard to
CEOCFOinterviews: What would be the advantage of acquiring a bank?
Mr. Crockett: One reason is that it gives you new revenue streams and new opportunity for profit. It also gives us a different presence in the community and would create a lot of opportunity for our mortgage portfolio, because we would have our own deposits and money on the interim piece to lend, and our cost of funds would be much cheaper. Our state licensing would go away, which is incredibly expensive. If you are an FDIC (Federal Deposit Insurance Corp.) company, you have exemption in just about any state in the country for mortgage lending, so there is some cost savings there that would benefit us greatly. The down side is that we are not a commercial bank, but a mortgage banking institution, so there would be challenges. Vertically integrating all of those arms together would be another challenge, although I think that is where we could achieve additional profit for everyone.
CEOCFOinterviews: What is your criteria when you look at expansion and what do you look for in the region?
Mr. Crockett: The first thing I look for is whether the region is conducive to our product fit. We do conventional FHA (Federal Housing Administration), VA (Veterans Administration) residential mortgage loans, Jumbo ARM (Adjustable Rate Mortgage) lending, which is what 85% of Americans have and want. Most of the marketplaces are conducive from a demand standpoint. California is an escrow state and there are a lot of different things that go into lending in the state of California. You have to be very careful and make sure you know exactly what you are doing there, in other words, there are times when you should be apprehensive about moving into a territory because of state regulation. You can also be little concerned about moving into a territory because of fraud; there is a tremendous amount of fraud in certain sectors and areas of our country that people tend to stay away from. Unless you have a local presence, with local influence and local knowledge representing your company, you can find yourself in trouble. We have had some trouble with fraud in the past, and we try to be careful about that. You also want to move into areas that are growth oriented because the purchase market and building market is what sustains a mortgage banker through the tough times. We want to make sure we position ourselves well in growth territory. We like Arizona and Nevada; they are booming areas. The Southeast has a lot of growth potential; we are based here in Nashville, which is one of the fastest growing communities in the country and has been for a long time. Nashville is a top-twenty city and it has grown into that over the last fifteen or twenty years. We want to make sure that our product fits, and that can mean anything from loan amount to the type of borrower and those kinds of things.
CEOCFOinterviews: Have you looked at the east coast?
Mr. Crockett: We have gone as far north as Maryland, and we are in the southern east coast in places like Virginia, the Carolinas, D.C. etc.; but the upper northeast is a place where you need to have somebody staffed up there, and maybe even a regional office there, with your people and staff who know the market and are born and raised in the area. It has some big city/small town feel to it; plus you need to know the ins and outs of the marketplace. Pennsylvania for example, is a very difficult state from a licensing standpoint and you have to have a local office and a W-2 employee on staff before you can even be licensed. So you have no ability to even go in and generate any revenue to cover the cost of starting an operation prior to starting it, because they wont allow you to do that. In our business, on a third party side, we want to do this in every market. You have to work with those kinds of restraints and different challenges in all parts of the country. The northeast is one of those areas that we certainly want to move into and want to have a presence in as we continue to grow and become the kind of company that we want to be. I think it is something that we have to be ready for, and we have such a mass opportunity in front of us in these other areas. More than anything, it hasnt been a focus yet, but it will be.
CEOCFOinterviews: Tell us about the relationship between your reps and the brokers and how many they are expected to handle?
Mr. Crockett: Yes, on the Wholesale piece, their customer is the broker; they wont meet with agents or builders, the broker will do that. Every account rep needs to have at least 75 accounts signed up over a period of years. If it is a new market, in 36 months, we would like to have 70-75 brokers in the territory. We try to make sure they have a territory that is capable of providing that, but we dont want them to have much more than that; they might interchange, terminate some relationships, add some new ones, and they are constantly prospecting; but we dont want them managing many more accounts than that because it is very difficult to do. In truth they are not going to do business with more than 15 or 20 of those 75, at any given time. We want them to saturate the market.
CEOCFOinterviews: On your website you have a page that says Retail will you tell us about that, and do you work directly with individuals?
Mr. Crockett: Yes! Retail is our oldest division and it is how we started the company. It is very solid. We have a great presence in Tennessee, South Carolina, and a little bit of North Florida. Retail is something that is expensive to grow without a lot of capital. We have a strong balance sheet with no debt, and growing retail can be very capital intense and expensive. We have tried to grow the markets that we are in and will continue to add market share. We still have a lot of upside opportunity for market share even in Tennessee, which is our backyard. It does very well; and it is profitable. We are in the top ten in total market share in Tennessee. We are probably teetering in the top fifteen in South Carolina. We do well on the retail side and it gives us a presence in the community and an opportunity to touch the community of Nashville where we are headquartered. Retail gives us involvement, is profitable and is a very big part of our company.
CEOCFOinterviews: You have a partnership with GE, can you tell us about that?
Mr. Crockett: There are five companies that we partner with in different ways, including GE (General Electric Company NYSE: GE). With GE, we have a private label product on an automated underwriting engine. Our other partnerships are with mortgage reinsurance companies. We have what you would call captive reinsurance contracts, where we reinsure mortgages with them.
CEOCFOinterviews: I see from your site that your partnership with GE includes the opportunity for your customers to purchase GE products, has that been beneficial?
Mr. Crockett: Yes, it has been. It provides our customer with the ability to go online and access products that they dont have to get directly through us. It is a service thing and it allows them to be more efficient and to get some things done directly without having to come through us initially, which allows them to be more successful on the front end. It also allows us to have more capacity.
CEOCFOinterviews: Whom do you need to reach to help grow your business and why should they consider Franklin American Mortgage Company?
Mr. Crockett: We
need to continue to reach the small regional bank or local bank that is in the mortgage
business. We need to find them, speak with them and let them know that we should be
their Correspondent lender of choice because we are going to give them the hands-on feel
that they are looking for. We know what it is like, to operate the way that they operate.
We have been there and done it; we know about insuring and underwriting. We know about the
challenges that are there when you are doing five to twenty-five million dollars a month
in lending; but you also have a bank customer that is depending on you to service and
provide a quality transaction for them and you dont want to mess it up because you
have four or five other levels to the relationship. We need to continue to reach them and
let them know we can meet their needs.
CEOCFOinterviews: Are you profitable in all areas of your business?
Mr. Crockett: Oh yes!
CEOCFOinterviews: Can someone looking to work with you can be confident that you know how to weather any storm and meet their needs?
Mr. Crockett: No
question! We are here to stay. We have a strong balance sheet and we are only going to get
better. Even in the market that we are in right now, we are still nicely profitable and we
will continue to be. I think we are going to have a wonderful year in 2004 when the
industry is projected to be down as much as 65% over last year. I think we are still going
to have a very nice, comfortable, solid year at Franklin American Mortgage.
Mr. Crockett: I certainly pray every day and ask for Gods direction and His leadership; He has been the leader of this company since day one. The first year that I had this company, one of my most tenured employees, and top loan officers, and I prayed together for an entire year and dedicated and gave the company to the Lord. We asked Him to be the leader and head of it; and we certainly have been greatly blessed. As we go forward, we certainly are going to need His hand on us, because we have some great challenges ahead, but I think we are well-positioned business wise.
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