In another sign of Wall Street's heightened interest in acquiring mortgage originators to feed their securitization businesses, Goldman Sachs Group Inc. has taken a minority stake in a wholesale home-lending start-up.
The start-up, LownHome Financial Holdings LLC in San Jose, is being run by Marc Geredes, the former chief executive of National City Corp.'s First Franklin Financial Corp.
A spokeswoman for Goldman confirmed this week that it has a minority stake, but she would not discuss its motivation.
Wall Street firms, which have long purchased loans in bulk to repackage as mortgage-backed securities, have been getting more involved in the origination side of the business in the last few years.
Lehman Brothers is considered the investment bank with the closest ties to the origination business, as a result of both internal growth and the five small-lender acquisitions worth $219 million it made in 2003 and 2004.
This week National Mortgage News, a sister publication of American Banker, reported that Deutsche Bank is considering buying a New Jersey mortgage bank. A spokeswoman for Deutsche Bank had no comment.
About a year ago Bear Stearns Cos. opened a mortgage wholesaler, Bear Stearns Residential Mortgage Corp.
Last week Bloomberg News reported that Merrill Lynch & Co.'s chief administrative officer had said in an interview that it was in "dialogues" with mortgage originators it may buy.
John Mack, Morgan Stanley's CEO, reportedly said Monday at an investor conference in New York that his company is also interested in buying mortgage firms.
At the same conference, Douglas Flint, the group finance director of HSBC Holdings PLC, said he found the trend puzzling.
"We find it intriguing at the moment to see so many of the Wall Street firms seeking to find mortgage origination capacity to feed their … securities businesses at a time when mortgage origination volumes may fall," he said.
Mr. Geredes joined First Franklin in 1986 as a retail loan officer, succeeded founder Bill Dallas as the CEO in 2001, and left in 2003. (Merrill bought a stake in Mr. Dallas' Ownit Holdings last year.)
LownHome opened for business this month. A Pittsburgh center serving the Northeast opened Monday; in July the lender plans to open a center in Baltimore to serve the Southeast and one in Portland, Ore., to serve the Northwest.
In an interview Tuesday, Mr. Geredes said that LownHome would start out by selling loans to Goldman's conduit. However, "if there's somebody else out there bidding up [for loans], we'd be foolish not to take that."
Aside from Goldman, Mr. Geredes said, two New York hedge funds (which he would not name) have also taken minority stakes. LownHome's management team is putting up most of the capital.
The company would compensate for the tight margins in today's market by operating at a low cost, he said. Corporate functions such as human resources, quality control, and technology are being outsourced to "domain experts." All the software is Web-based.
The sales force is more centralized than the ones at most wholesale shops, Mr. Geredes said. "People in chairs" handle customer service calls to free up those in the field to make presentations to prospective clients. Both groups will receive smaller commissions than traditional subprime account executives, but the rainmakers can make it up on volume, he said.
Mr. Geredes said he received "tons" of interest from investment banks when he was raising capital for LownHome, and the recent deal talk in the mortgage sector did not surprise him.
"These guys want to control volume," he said. "They're looking at … the number of companies that have been severely wounded and they believe if they can pick up a company [cheaply] and 'fix it,' they can get control."
The problem is the bid/ask spread - originators want to sell at "six-months-ago prices" and the investment banks want the prices that will prevail "six months from now," he said. "Will any of these deals get done? I don't know."
