Franklin, TN-Times have been tough but Franklin American Mortgage Co. plans to continue to grow by sticking to conservative lending traditions, keeping an eye out for fraud and adapting to advances in regulation and scalable business-to-business automation, according to president and chief executive officer Daniel G. Crockett. It also plans to start retaining some of the servicing on its mortgages.
Mr. Crockett believes Franklin American may produce $22 billion to $25 billion in government/government-sponsored originations this year, up from more than $18 billion last year. It has been considering cautiously increasing its sales force by 5% to 10% and possibly replacing some existing staff that lag in performance.
Recently, Franklin American has primarily been a correspondent lender, producing about 57% of its business through that channel year-to-date as of March 12. It produces another 36% through wholesale and 7% through retail, Mr. Crockett said. All of its loans have been sold servicing-released but starting early in the second quarter it plans to begin retaining some servicing, a move he said the company considers prudent given its top-15 lender status and “the market environment being what it is.”
Like others, Franklin American has had to contend with capacity issues as rates dropped and refinancing ticked up at the end of last year into the beginning of this one. Mr. Crockett said its staff has handled them but working “a little harder” and “a little later,” something he found preferable to hiring new staffers who might have to be laid off when business slows.
While others have experienced longer loan lock extension due to these capacity issues, Franklin American said its service levels have remained “relatively good,” although by necessity today’s underwriting and funding is “a lot more involved” than in the past. “I can’t say we’ve seen huge, drastic change,” he said, although he noted the industry as whole has not been “at peak service levels.” Some larger competitors, he said, have offered “nothing else but 90 day locks.”
“That’s the minimum in play for refis for some people,” Mr. Crockett said. He said Franklin American has been encouraging longer lock periods due to the refi environment but has no particular corporate policy on the question.
While many have dropped out of the wholesale channel due to funding capacity issues linked to past exposure to problem assets and/or warehouse line challenges, Mr. Crockett said Franklin American has been fortunate enough not to have as much risk as some others on those areas.
Although “for everybody, credit is tight everywhere,” Mr. Crockett believes the six-bank syndicate that supplies its financing has been solid and it is relatively strong in that area. He acknowledged, however, that the concern has been a concern for “all independent mortgage bankers” as players like Pittsburgh-based PNC Bank’s National City and Dallas-based Guaranty Bank were dropping out of the business at press time. Warehouse provider Colonial Bancgroup, Montgomery, Ala., also has been under financial strain and applied for federal Troubled Asset Relief Program aid. However, he said he believes Franklin American is “as healthy as a financial company can be.” He said his company has been looking at other warehouse providers and at extending the capacity of its existing lines and that, while its options are limited, it has been able to make some headway in that area and is “relatively positive about the potential for future lines” for itself.
“At one point there were over 100 warehouse banks, now there are roughly 25-30.” He said the universe of warehouse financing has shrunk in size from $220 billion-$225 billion to less to $30 billion in the last 18 months. Today he said Wall Street providers and commercial paper funding are “pretty much 100% gone.” Some servicers offer repurchase facilities in conjunction with early purchase programs in a “hybrid” form that combines the two but there is “not a lot of that out there.”
“Wet facilities really constricted,” he said.
While some have questioned the wholesale channel’s future viability, Mr. Crockett believes losing it would be damaging both to the business and to consumers. “The mortgage broker network is vital to the industry.” Removing the broker from the equation, would damage competition greatly, hurt service levels, further constrain origination capacity and cause interest rates to “go through the roof,” Mr. Crockett said. He favors regulation and educational requirements in the sector but calls the idea of “doing away” with it “ludicrous” for the aforementioned reasons.
Mr. Crockett said that generally he has been on board with recent regulations that some have seen as potentially constraining business, notably the Federal Housing Administration’s increased in the required minimum downpayment to 3.5% from 3% and recent risk-based government-sponsored enterprise fees. However, he said he could understand the concern surrounding these moves. “When you do something that’s different than what’s done historically people are a little bit shocked.”
While some have raised concerns that risks in FHA product have been increasing as other options for less traditional borrowers have disappeared, Mr. Crockett said the underwriting in this area is “nowhere near” what is was in the notorious subprime sector, even though some have said borrowers who might have once turned to the latter are now looking at the former. “I don’t think FHA product will deteriorate,” he said, adding that – in contrast – underwriting in this area will become more conservative over time. FHA, he said, has “obviously more risk” than Fannie Mae or Freddie Mac, but its risk does “not even approach” what was seen in the decimated subprime and alternative-A credit sectors.
Market discipline may help contain the risk in the sector, he said, citing as an example the fact that while the FHA does allow lower Fair Isaac & Co. credit scores, many in the market have been low to dip into this range. “There are a lot of credit overlays in place,” he said, noting that among large lenders he has generally seen 620 been used as a minimum for FHA loans. Mr. Crockett said he has found that, in his experience, the chance a loan with a FICO under 550 will perform well is “slim to none” and business in this area is dying out, although at least one other FHA lender has disagreed.
However, even a bigger concern than credit these days is fraud. Mr. Crockett calls it “the greatest risk to any product line a[bar] especially FHA,” something he said his company addresses by being “mindful of it.” He said the topic has been discussed at length with its operational team and its underwriting, closing and funding staff are “hypersensitive” to it, particularly at the prefunding level and the preunderwriting level. He said that among the quality control steps the company takes to mitigate this risk include IRS form 4506 income verification, appraisal checks, antifraud software, automated valuation models, and examination of collateral to ensure it is not fraudulent. The company also checks into the integrity of the borrowers it is lending to as well as other parties to the process, especially those in a third party role.