Survivor: North American's Battle-Scarred Chief

When North American Mortgage took itself off the auction block in the middle of last year, it joined what would prove to be an exclusive club.

Only one other big independent mortgage company - Countrywide Credit Industries - braved the post-refinancing storm on its own. The rest sold themselves to commercial banks.

After one quarter of losses and another of marginal earnings, North American appears to have put the worst behind it. Earnings rose sharply in the first half.

President Terrance G. Hodel, 52, has managed the company through a difficult contraction.

"It was painful," Mr. Hodel said in a recent interview.

North American, based in Santa Rosa, Calif., laid off 1,100 employees, many of whom had worked around the clock during the refinancing boom.

Like other mortgage bankers, North American had staffed up for the boom. At the highest point - in September 1993 - the company had 3,500 employees.

Amid the cutbacks, North American went ahead with its planned expansion in the Midwest and Northeast. "We were about a third of the way into it, so we decided to continue - on the theory that it was still cheaper than buying companies," Mr. Hodel said.

"In fact," he added, "it has worked out that way."

North American also reengineered its originations process. Mr. Hodel declined to give details, but he said that as a result of the changes, fewer people now work with the loan file and the time it takes to process a loan has been cut by half.

Last year's rising rates triggered a free fall in loan volumes from 1993's record $1 trillion level.

Mortgage bankers, who had been the biggest beneficiaries of the fixed- rate lending boom, were hit particularly hard by the contraction.

Large independent mortgage banks, many of which had gone public in the early 1990s, sought to be acquired by commercial banks. And banks, eager to deepen their presence in consumer lending, paid rich prices for the deals.

North American tested the waters as well, but withdrew - reportedly because it couldn't get the price it wanted.

Lacking the deep pockets of a bank parent, North American slashed costs. Since last year it has chopped out $45 million.

To maintain cash flow, North American sold servicing rights, generating $121 million last year. As a result, its portfolio shrank by 14%, to about $14.8 billion by yearend. It appears to have stabilized at about $14 billion.

The company has also tried to get a piece of the adjustable-rate mortgage market by writing loans for large thrifts, such as Home Savings of America.

Basically, Mr. Hodel said, North American believes its strategy has worked.

"We feel we're very competitive," he said. "We're going in the right direction."

But unexpectedly tough pricing continues to squeeze profit at the company.

"We were certainly convinced that the price competition would abate this year by now, on the theory that when the market got thinned out, the competition would lessen," Mr. Hodel said.

"But in fact what has happened is that the pricing competition has gotten considerably worse," he said. "Pricing has become very, very much more competitive, in the wholesale business, at least."

He said large banks were responsible for the aggressive pricing, and he also cited a new accounting rule that allows lenders to recognize servicing rights on the loans they originate.

Instead of paying high prices for loans originated by others, lenders are competing to generate servicing rights through wholesale fundings of business brought in by brokers, Mr. Hodel said.

Analysts praise the cost cutting and disciplined operations at North American.

"They've been very aggressive at managing expenses," said Gary Gordon, an analyst at PaineWebber. "They lost money over the last year, but they're still around to deal with their competitors."

But in the long run, the company will probably be squeezed out through pricing pressures from larger competitors as well as the shift toward automated originations, Mr. Gordon said.

"I think the future will grow more difficult," he said. "More of the origination business is being computerized, and therefore there is less need over time for originators such as North American."

Analyst Thomas O'Donnell of Smith Barney said North American will become an attractive acquisition candidate sooner or later.

Mr. Hodel is philosophical about North American's inability to consummate a sale last year. He said he had been "basically neutral" on the issue.

"I was working hard to get it done," he said. "And when it didn't get done, we were all working hard to continue with our business plan."

Is he relieved that North American wasn't sold, particularly after the well-publicized departures of mortgage banking executives at bank-acquired firms, such as David Frank from Chemical Residential Mortgage?

Mr. Hodel points out that North American was owned by Wells Fargo before being spun off in 1985 as Imco Realty Services. It went public as North American in 1992.

"It's better to be independent, no matter who buys you," he said. "You can make your own decisions, reporting only to a board. That's better than having to report up a line in a large company."

Mr. Hodel knows about this firsthand. He has been at North American since 1979, and thus through all three of its incarnations.

Asked if there were other things he would like to do inside or outside the industry, Mr. Hodel replied that he hadn't given it much thought.

"This is a very exciting business, sometimes in a happy way and sometimes in a very hard way," he said.

"The years just kind of go by. You're always looking ahead. And you look up and it's Christmas again."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER