After a year of steering Resource Bancshares Mortgage Group through choppy waters, chief executive officer Douglas K. Freeman said the company is on course for a turnaround this year.
When Mr. Freeman, former president of Bank of America Corp.s consumer finance group, joined Resource in January 2000, the Columbia, S.C., mortgage company was caught in a rapidly changing market. It had lost $8.6 million in the two preceding quarters and continued to bleed cash during his first year at the helm, when it lost $42 million.
Yet he said Resource did what it had to do last year to refocus and reform itself, and that with the changes now in place, it is poised for a comeback.
Twelve months later, I believe we are now well positioned to capitalize on all the changes we have made, Mr. Freeman said. We have totally reengineered and retooled the company.
He said he assessed Resource early last year and determined that several changes needed to take place. Under its old business model, Resource concentrated on volume and originated predominantly the conforming loans that Fannie Mae and Freddie Mac purchase in the secondary market. Though the margins on such loans were thin, until 1998 the company made consistent profits.
But the world changed, and that no longer worked, said Michael McMahon, associate director at Sandler ONeill & Partners. Doug realized that, and now the company is focusing on profitability, not volume.
Toward that end, Mr. Freeman, 50, said he has changed the companys focus from originating as many loans as possible to making profits from each of its customers. Resource originates and purchases loans through mortgage brokers and correspondent lenders.
We have an expression that we would pay for volume and pray for profits, Mr. Freeman said. It worked out for a lot of people in the last decade, but in the year 2000 and beyond, the new expression is: Volume is vanity, profits are sanity.
Over the last year Mr. Freeman has expanded Resources product line to include higher-margin loans such as jumbo, adjustable-rate, and Alt-A mortgages. He also conducted an in-depth analysis of the companys product and customer revenues and implemented a compensation system directly tied to profitability.
We had to totally retool a company that only cared about how big we were to a company that cares more about our income statement than our balance sheet, he said. We couldnt care less where in the origination rankings we are. We care about where we are in the rankings of income statements.
In addition, Mr. Freeman streamlined Resource by selling its commercial mortgage operation and its residual assets from subprime securitizations. Those sales brought in $30 million, which the company used to buy back shares which for most of the last year wallowed well below $10. Its leasing business is also for sale, but thus far no buyer has surfaced.
But more importantly, according to a research report by Sandler ONeill, Resource is now making a move to free itself from dependence on interest rates and origination volume, which drive the revenues and fortunes of most mortgage companies.
It is in the process of developing a new business to provide private-label mortgage banking for smaller banks, thrifts, and other originators, the report said.
The new business would target smaller financial services institutions that want to originate mortgages but are forced to take a loss or send customers to competitors, and potentially lose them, because of the complexity and thin margins on mortgages. Resource would act as a third-party mortgage provider to which smaller banks would refer their customers, according to the report.
Mr. Freeman said it is vital in the mortgage business to streamline the application process, which now takes a month and a pile of paperwork to complete.
Many banks give $50,000 credit cards in 42 seconds after asking six questions, he said. In the mortgage business, for a $50,000 mortgage it takes 30 days and eight pounds of paper.
Fannie Mae and Freddie Mac hold the keys to easing the process, he said.
Steven F. Herbert, 44, chief financial officer of Resource, said everyone involved in the mortgage process would benefit from a reduction in the level of processing thats required to deliver these products to the market.
Meanwhile, Resource has been buoyed by a resurgent refinance market. The company recently reported that its January production soared almost 50% from last year, to $701.8 million.
Im very pleased with what theyve done and the speed at which they were able to execute their plan, Mr. McMahon said. It was a very ambitious plan that was set publicly at the beginning of the year, and they accomplished all of it, on target.
Mr. Freeman said that a lot good old-fashioned hard work by a lot of people last year got the company where it is today. We feel good about where we are.