The Syndicate, the Shoeshine Boy, and Knowing When to Get Off the Ship

In 1999 I was a 23-year-old kid with long hair and very little business experience. I'd read a career book, and the idea of getting paid to lend people money sounded pretty good. So, I answered an ad and started cold calling for a small mortgage broker. Later, and with that experience, a family friend got me in the door at a North American Mortgage branch. At first I worked on commission only, volunteering to learn the trade as a loan originator. The branch manager was a friend of my mom's. I also quickly realized she didn't really know how to run the place, and with all the modesty of a 23-year-old, I was sure I could do it better.

That would have to wait. I was selected out of 600 applicants to take a salaried job at a big financial services company at SunAmerica (soon to be AIG) in the annuity business and went to night school. Eli Broad, one of the wealthiest people in California and the co-founder of homebuilder Kaufman & Broad, was at the top of that company, and I'd corner him at company parties to pick his brain. I wanted my own company.

The clue on the radio

On my drive to work and to night school, the radio was wall-to-wall mortgage ads. They all used the same rule of thumb: if your rate is 2% higher than ours, it's time to refinance.

Over the months I noticed that number kept shrinking. First it was 2%, then 1.5%, then 1%, then half a percent. By the height of the market, "no points, no fees" was the norm. I'd also seen at North American that borrowers were taking short-term loans with two-year fixed periods and planning to refinance when the teaser ran out. Put those two things together and loans were going to turn over again and again, even if rates stayed flat. In the annuity business we called that "churning." To me it meant opportunity.

In January 2002, I walked away from my secure job with shorter hair and a little more wisdom.

Two and a half people

I put together a presentation and pitched it to a room full of people, including the old employer I'd cold-called for. My presentation had a few ideas I was proud of, like combining tax planning with the mortgage so borrowers could deduct points in the right situations, and bringing insurance agents into the loan process.

That old employer owned a tiny shop called Western Pacific Mortgage. His whole staff was one part-time processor. We made a deal: he'd cover my expenses, and I'd build a company around him.

I took everything North American had taught me, plus everything I wished it had, and built a training system. Prior to this, you needed two years' experience to get in the industry. Then I recruited people with mostly no experience and taught them the job. In the first year we funded about $10 million in loans with two and a half people, counting me. By the end of year two we had more than 40 loan officers. We outgrew our 750-square-foot office in about six months, moved into roughly 4,000 square feet, then doubled again. Along the way we started Caliber Escrow and a small real-estate brokerage, Western Pacific Realty. Meanwhile I was in Pepperdine's MBA program, sitting in a mortgage banking underwriting class at night and running three companies by day.

Lucky Luciano, mortgage edition

By 2004 the refinance wave had cooled. I wanted to move up from broker to banker, but we'd spent most of our cash on growth and the escrow company. I felt stuck.

Then I watched a History Channel biography of Charlie "Lucky" Luciano. I'm not recommending him as a role model. But after the Castellammarese War in 1931, Luciano did something remarkable. He got a group of bosses who had been actively trying to kill each other to sit down at one table, the Commission, and work together toward shared interests.

I thought: mortgage brokers don't like each other much either, but at least they aren't armed. And mortgage banking runs on volume. If I could get competing brokers to pool their loans, that combined volume would carry real weight.

So I built my own syndicate. I collected letters of intent from competing brokers representing more than $750 million a year in loans. I designed a quality incentive plan that gave syndicate members perks and extra pay for clean loans. Then I took those letters, my 40-plus loan officers and the escrow company to the owner of a local mortgage bank. It was selling loans online under the name Casablanca and would become Shearson's wholesale business. We worked out a merger, and I started building the wholesale channel.

The syndicate blew past the online business. Wholesale became 90 percent of our volume, about a billion dollars in under 12 months. In about three years we went from roughly $10 million a year to more than $1.2 billion across 26 states.

The shoeshine boy

There's an old Wall Street story. In the summer of 1929, Joseph Kennedy, JFK's father, was getting a shoeshine when the boy gave him stock tips. Kennedy reasoned that when the shoeshine boy has tips, the market is too popular for its own good, and he got out before the October crash. Historians aren't sure it happened that way; the earliest version in print is from 1959.

By 2005 I was uneasy. I couldn't see what the big lenders, the rating agencies and the investment banks were doing behind the curtain. What I could see was the industry turning into a used-car lot. The culture didn't fit who I was, and I wished it were harder to get into the business.

Then, at a party, a friend introduced me to his date, someone he'd met on MySpace. Let's just say I didn't expect her to be a mortgage professional. Before I could tease him about MySpace offering services I didn't know about, she told me she was a wholesale account executive at one of the big subprime lenders.

My jaw hit the floor, and that ended the conversation. Here was my shoeshine boy.

That one conversation didn't make the decision. It sent me back to do a lot more homework. But it pointed me the right way. I unwound the merger, took a modest liquidity package in 2005 and got off the ship. Within two years, subprime lenders were failing one after another, and by 2008 the whole system was in crisis.

The lesson from the trenches

You can grow very fast when you get people who don't trust each other to see what they have in common. That's half the job. The other half, and the harder half, is staying alert to strange little clues, whether it's a radio ad or a date at a party, and leaving the party while the music's still playing.

If you built something great and are wondering whether it's time to get off the ship, let's talk.