A New York private equity firm run by the former longtime head of PaineWebber Inc. is making a bet on the home equity business.
Donald B. Marron’s Lightyear Capital on Thursday said it had agreed to buy the home equity business and assets of DeepGreen Bank from Third Federal Savings and Loan Association MHC of Cleveland.
“Americans in the last few years have [put] a big emphasis on hearth and home, so homeownership as a trend in this country is very, very strong, and we think it will get stronger,” Mr. Marron said in an interview Thursday. “Any company that finds a way to leverage that asset, or provide creative ways to use that asset, seems to me to be in a good business.”
Lightyear did not say how much it would pay, but it says it focuses on making investments of between $25 million and $100 million.
DeepGreen, also based in Cleveland, specializes in selling home equity lines of credit to superprime borrowers. It markets the lines through a Web site, through brokers, and through business-to-business relationships, and it touts its automated processes.
On its Web site, the thrift also offers certificates of deposit and first mortgages from Washington Mutual Inc.
Mr. Marron said that DeepGreen matched perfectly the type of company Lightyear’s fund, which has invested half of its assets in financial services businesses, wanted to acquire: an online home equity lender serving borrowers with high credit scores.
“We thought that if this is not a unique company, it’s one of very, very few” that fit that profile, he said.
The deal had been in the works for six months, Mr. Marron said. Lightyear expects to own DeepGreen for three to five years, he said.
Marc A. Stefanski, the chairman of Third Federal, one of the largest mutual thrifts, said it put DeepGreen up for sale in January of last year.
Mr. Stefanski said 30 entities submitted bids, including private investors, venture capital firms, software companies, and big banks — “a myriad of different kinds of companies, all with different ideas on how they would employ the DeepGreen Bank concept.”
Pending regulatory approval, the acquisition is expected to close in the first quarter.
Lightyear, which manages $2 billion of assets, would acquire DeepGreen’s technology, its 80 employees, its commercial relationships, its $1.5 billion servicing portfolio, and about $250 million of home equity debt. Third Federal would keep its $400 million of deposits.
DeepGreen would give up its federal thrift status, and it would no longer take deposits. Instead, it would operate as a mortgage bank and would rely on traditional mortgage funding sources, such as warehouse lines, said Jerome Selitto, its chief executive. It may also start to securitize some of its home equity lines and loans.
According to Mr. Stefanski, it had always planned to unload the 3-year-old DeepGreen, either through a sale or a spinoff.
Mr. Marron spent 20 years at the helm of Paine Webber, which UBS AG bought in 2000. He stepped down as the securities brokerage’s chairman in 2001. At one point he was a candidate to become the chairman of the Securities and Exchange Commission.
He remains the nonexecutive chairman of the Swiss bank’s UBS America, and he is a director at Fannie Mae.
In an interview Thursday, Mr. Selitto said that DeepGreen would benefit from Mr. Marron’s experience and from a bigger capital commitment than Third Federal — which had $8 billion of assets at yearend and does business only in Ohio and Florida — was willing to make.
Mr. Selitto said that Mr. Marron is “very actively involved” in Lightyear’s investments. “I’m very much looking forward to that.”
But Mr. Marron sounded like he would be more of a mentor than a boss.
Lightyear’s strategy “is to look for companies that have good management,” he said. “We can obviously help the management in the financial services business, but ours is definitely a very supportive role.” Mr. Selitto would continue to run it, “and we’re going to be very supportive.”
Mr. Selitto said he expects DeepGreen to eventually double its origination volume. The amount of untapped home equity rivals the size of the first mortgage market, and the use of home equity products is set to expand even more, thanks to the recent “sea change” in how consumers view them, he said.
Debt consolidation is no longer the main reason consumers take out home equity loans, he said. If it were, DeepGreen would not have so many borrowers with high credit scores.
“Not only do we see [home equity] as countercyclical to the mortgage market, but we really see it replacing other forms of consumer credit,” he said. “I think people are finally attuned to their mortgages and the rate that they’re paying and the options that are available to them.”
Mr. Marron agreed with that prediction. “We figure this company’s been doing very nicely in this declining rate environment. And so it will do even nicer in a rising rate environment.”
By concentrating on home equity, DeepGreen has been able to automate most of its operations. It uses automated underwriting and valuation models instead of manual appraisals, and it allows its borrowers to schedule the closings themselves. It also gives most online applicants an unconditional credit decision within two minutes.
It processed 61,000 applications in the first half and originated 9,500 home equity products worth a combined $700 million.
