Bill Dallas, whose Ownit Mortgage Solutions Inc. was the first high-profile casualty of the current crisis, is attempting a comeback with a business model that reflects the lessons he has drawn from the bust.
The lessons include a need for a stable funding source; the hazards of lending through intermediaries; the boomerang nature of mortgages sold into the secondary market; and the importance of tying salespeople's compensation to loan quality, not just volume.
Since Ownit filed for bankruptcy protection nearly 18 months ago, Mr. Dallas said, he has raised $15 million to $20 million to buy all or part of a federally chartered bank or thrift. He also has stakes in three California mortgage origination companies and would use that equity as part of the consideration for stock in the depository.
The goal is to gain a more reliable way to fund loans than the warehouse lines that Ownit relied on — and quickly lost access to when Wall Street soured on the lender.
"When you're a thinly capitalized mortgage bank, you can only qualify for a thinly capitalized mortgage line with thin guarantees," Mr. Dallas said.
In addition, unlike Ownit (or First Franklin Financial Corp., another defunct mortgage lender that Mr. Dallas founded), the company he envisions would not lend through brokers or correspondents.
"We're not going to fall prey to trying to do third-party" originations, he said. "We're just going direct to the consumer. Our expertise is retail."
To protect itself against forced repurchases of delinquent loans — the problem that precipitated Ownit's demise — the new lender would buy "an originator warranty" for each loan. The insurance would cost $80 to $100 per loan and cover the lender for $50,000 to $250,000 of losses resulting from repurchases, fraud, or misrepresentation without requiring loan-by-loan inspections.
"What killed us at Ownit and what killed the industry was, the buyers were pushing these loans back in record numbers," Mr. Dallas said. "Having this insurance is one way to bring credibility back."
One of the three origination companies Mr. Dallas has invested in, the Calabasas, Calif., lender Capital Line Financial Services Inc., is already buying such coverage from Red Viking Insurance Co. in Agoura Hills, Calif. (The other two are Diversified Capital Funding Inc., a mortgage brokerage and lender in Fremont, Calif., with 150 loan officers and roughly $1.5 billion of annual originations, and Skyline Financial Corp., an Encino, Calif., brokerage with 13 offices in Southern California. He is the chairman of all three.)
The reason so many mortgage companies have failed, Mr. Dallas said, is that salespeople are compensated for production, not performance. The insurance, which enrolls a loan electronically for tracking, would let the new company keep tabs on the credit quality of each loan officer's output, he said.
"This is how to create a performance-based culture," he said. "I'm going to hold back something for quality and performance, and this gives me a way to insure and monitor it."
He founded First Franklin in 1981. By 1999 it was majority-owned by CIVC Partners, a private-equity firm that sold it that year to National City Corp. for $266 million. (Mr. Dallas bought Ownit in 2003 from a group of investors after his noncompete agreement with National City expired.) In late 2006, at the peak of the market, National City sold First Franklin to Merrill Lynch & Co. Inc. for $1.3 billion. Merrill shut down most of First Franklin this year, keeping only the servicing business.
Though best known as a mortgage banker, Mr. Dallas has experience with depository institutions. He co-founded Heritage Bank of Commerce in San Jose in 1994 and California Oaks State Bank in Thousand Oaks, Calif., in 1999.
"The margins are fatter in banking," he said, describing how a mortgage company makes $2,000 on a brokered loan whereas a bank makes $5,300 in retailing its own loan.
"We have to go find a bank. We want to jump into a highly regulated market because that means you get a 'Good Housekeeping' seal of approval."
The depository would retain up to 20% of the loans originated by his lender, as well as the servicing rights.
Mr. Dallas said he is looking for a bank or thrift with "an entrepreneurial ethic" that "isn't scared by the cyclicality of the mortgage business."
