Richard Eastons $10,000 how-to-start-a-mortgage-bank CD-ROM may be the best evidence yet of how commoditized a field with notoriously low entry barriers it has become.
In a refinance boom, mortgage start-ups pop up like umbrella hawkers during a Manhattan rainstorm. But Mr. Eastons company, Startbank, says its product is good for any business climate.
Those willing and able to shell out the money for the 570-page CD-ROM get, among other things, standard preliminary consulting on opening a small-market or midmarket mortgage shop. This includes advice on obtaining warehouse lines of credit to fund the loans and access to secondary markets to sell them. (He identified Countrywide Warehouse Lending Inc. and First Collateral as two of his many warehouse sources, though this could not be confirmed.) Then Startbank provides further guidance, at a fee.
Fundamentally, mortgage banking is a business that is very quick to get started and become profitable, because there are no accounts receivable and no inventories, Mr. Easton, 45, said during an interview in his offices in New York. The business is unlike any other, because the profit per transaction is so great that a company needs to produce relatively few transactions to realize a great amount of total profit.
Some industry veterans dispute that reasoning. Many say that consolidation and shrinking margins have even the biggest players sweating to make much of a profit.
Michael P. McMahon, an associate director at Sandler ONeill & Partners, said a handful of megacompanies and thousands of brokers but very few in the middle are doing well in this segment.
There are only two groups that are making money in the mortgage business, and thats the two GSEs and the brokers, Mr. McMahon said. There are no middle-market mortgage banks anymore they cant compete.
Analysts and executives in the field, none of whom were directly familiar with the Startbank product, said they had doubts about the concept. But some acknowledged that mortgage lending may well have evolved to the point where one could shrink-wrap and sell the business model.
Theres not a lot of rocket science in getting started in this business, a mergers-and-acquisitions specialist said. But he added, If I were a potential buyer paying someone for 600 pages of canned materials, Id rather pay someone on an hourly basis for some real, live, intelligent specific guidance.
But Mr. Easton says that would cost a client hundreds of thousands of dollars. Instead, he offers a reasonably priced means of entering the business from another field. In addition to the $10,000 business plan, Startbank, which started doing business in March, offers ongoing services from a 22-member team of consultants billing $250 an hour half the per-hour cost to speak directly with Mr. Easton.
But with a voice made for radio, a teachers patience, and a passion for the mortgage industry, the CEO says he is in high demand by many of his clients, who appear not to mind the expense.
Mr. Easton says small operations have an advantage over the large lenders in that they can adapt quicker to a changing marketplace, both to capitalize on expanding opportunities and cut back to avoid trouble in leaner times.
A mortgage banker or broker can compete head-to-head with Chase Manhattan Mortgage Corp., and there is not a lot Chase can do about it, he said. A small mortgage banker can offer the same products and acquire money as inexpensively as Chase while operating, on a percentage basis, on less than 50% of the overhead. Mr. Easton also argued that small shops can provide more intimate service.
Overstating it a bit, perhaps, given Chases access to funds, but certain trends could favor Mr. Eastons approach.
Mr. McMahon at Sandler ONeill acknowledged that, with mortgage banks and brokerages essentially blurring into indistinguishable loan agents, there may be room for smaller companies.
To the extent that individuals are successful loan agents for larger banks and want to control their own destiny open up a mortgage brokerage requiring low overhead and a small capital contribution this could conceivably be a good thing, Mr. McMahon said.
Also, a refinance boom that started in late December has the business looking more attractive. But that allure could quickly wear off when rates inevitably rise. And even in this boom time, some observers wonder why rookies would take on a business model that many second-tier players at established banks find challenging.
There might be room for another mortgage broker that can bring loans to people that originate them, but the long-term winners in this segment are going to be the high-volume, low-cost originators, said Michael Crawford, an analyst with B. Riley & Co. To think you can compete with Countrywide some people might find some niches in a community but overall it seems like a stretch to me.
And, as Mr. McMahon notes, the cyclical nature of the business creates chaos for even the most skillful pros.
The industry is in equilibrium for about one hour every several years, he said. And when its not, youre chasing your tail trying to add staff to keep up with volume increases or youre chasing your tail trying to cut staff to keep up with volume decreases.
Mr. Easton responded by saying that his business plan stresses that clients focus on the purchase market, not refinancing. Overemphasis on refinancing during a boom, he said, is the single largest cause of mortgage company failures.
Though regulatory issues are not overwhelming, Ronald Glancz, a partner at the Venable, Baetjer, Howard & Civiletti LLP law firm in Washington, said mortgage banking is nonetheless a highly regulated industry. Buyers of Mr. Eastons product need approval for various state licenses and have to comply with myriad federal consumer protection laws, he said.
I would advise anybody getting into this business to consult with a very capable lawyer whos familiar with the mortgage banking business, Mr. Glancz added.
Mr. Easton said the CD includes current state licensing forms, and several pages on complying with federal regulations.
Startbanks customers include one who said she is in her second year of profitable mortgage banking. Irene Phillips predates the Startbank CD product, having started her mortgage bank in June 1998 using the plan as well as furniture and office equipment provided by Mr. Easton to start out.
Ms. Phillips, who worked for Mr. Eastons mortgage bank for two years, said she started her company, ESI Mortgage Corp. in Daly City, Calif., with $55,000. Within six months the bank was profitable, she said, helping her recoup her investment and pay a salary to herself, her husband, and her son. ESI doubled its profits in 1999 and 2000, Ms. Phillips, 51, said, and the company is on track to do the same this year.
For Mr. Easton, Startbank represents a continuation and extension of a family banking legacy. His family, he said recently in a conference room high above Wall Street, settled the United States in the early 1700s and founded banks in 16 cities all named Easton.
Mr. Easton opened his own mortgage bank in 1988 in San Francisco. After getting it off the ground he spent most of the next decade as a consultant for the mortgage industry, running his company in absentia. He sold it in 1998 for $2.5 million. In between he wrote and rewrote the now-voluminous business plan that forms the foundation of Startbank.
Shortly after selling his first company, Mr. Easton spent 18 months 12 months longer than he expected and $1 million of his own money on his new venture. Startbank opened in March, losing just $10,000 for the month. He said in April that he expected Startbank to turn a profit of $400,000 for the month.
In addition to a suite in Manhattans Soho Grand, a tony downtown boutique hotel where he lives, Mr. Easton keeps a vacation apartment in Paris.
His pitch blends realism about the challenge of starting a business and the lure of potential riches.
If customers do it themselves, the onus has to be a little bit on their own ability and intelligence, he said. I do not say it is the answer to all their financial dreams. I say it is a beginning.
The American dream, at least one of the American dreams, is to own a home. As tired as you may be at the end of the day, what I also do is make people millionaires, which is another American dream.
While customers appear to understand they have no promise of success, the image of Startbank and Mr. Easton as a counselor-cum-protector helps.
I came away from the initial conversations impressed with his ability to interact and understand my concerns and interests, said Keith Bauman, 38, who recently purchased the plan. In fact, in our first conversation, I probably cut him off. He seemed like he would take as much time as I wanted.
Mr. Bauman, who for years worked in a large corporate environment in this case, the health-care industry said he was drawn to Startbank for the chance of financial and professional freedom he could attain through his own business. But in contrast to many start-up offers he and others considered, Mr. Bauman said, Mr. Eastons plan and company provide a personal touch and safety net.
Patrick Jasper, 43, a former insurance executive who bought the plan a few weeks ago, said: Theres always risk when youre starting a business and Richards not making a claim that theres not but hes really giving you all the tools that are needed to be a success. Its almost like an insurance policy against failure.
Time will tell.