For years, business experts have said that metro Detroit needs to diversify its economy beyond the automotive sector.
That goal could be closer than ever, thanks to the recent emergence in southeast Michigan of a cluster of mortgage lending businesses that have been shooting up the industry’s national rankings. The region is home to four of the 20 biggest mortgage lenders in the country, according to industry publications including No. 1-ranked Quicken Loans, which just reported its most profitable year ever.
Three of the four companies have gone public on stock markets since last summer, and all of them are seeing strong year-over-year revenue and profit growth even amid the COVID-19 pandemic, thanks to a boom in mortgage refinancing spurred by historically low interest rates.
Southeast Michigan is now one of a handful of geographic power centers in the mortgage industry, which is otherwise highly fragmented. Industry experts say the other mortgage business clusters are in southern California, the Dallas area and New Jersey.
The southeast Michigan firms in the national top 20, according to rankings by industry observer Inside Mortgage Finance, are:
- No. 1 Quicken, based in Detroit, with 8% market share and $320 billion in total mortgage originations in 2020. It went public last summer as the biggest component of Dan Gilbert’s Rocket Companies.
- No. 4 United Wholesale Mortgage, known as UWM and based in Pontiac, with 4.5% market share and $182 billion in originations.
- No. 15 Homepoint, based in Ann Arbor with 1.5% market share and $62 billion in originations.
- No. 18 Flagstar Bank, based in Troy with 1.2% market share and $48 billion in originations.
Altogether, those four companies employ more than 20,000 people in southeast Michigan, not including thousands more out of state.
They are joined in the region by several smaller, yet still sizeable mortgage lenders, including Ann Arbor-based Gold Star Mortgage Financial Corp. and Hall Financial and Ross Mortgage Corp., both headquartered in Troy. Detroit-based Ally Financial, formerly GMAC, also has a growing mortgage-lending division, Ally Home, although most of those mortgage employees are in Charlotte, North Carolina.
Even among mortgage industry insiders, those outside of Michigan are still getting accustomed to the growing dominance of the greater Detroit area.
“I think people are frankly a little surprised,” said Willie Newman, CEO and president of Ann Arbor-based Homepoint, who has been in the mortgage lending business in the area since the 1980s, once leading a Michigan division of a company that owned the website Mortgage.com.
To be sure, the mortgage business is not one of stable and perpetual profits and can be just as cyclical as the auto industry, with a history of swinging from extraordinary highs to devastating lows.
Thanks to the latest refinancing and housing booms, the overall industry had a near record-breaking year in 2020 and local firms including UWM and Homepoint went on hiring sprees.
But the boom times could be nearing an end. The mortgage market is forecast to shrink 20% this year, according to the national Mortgage Bankers Association, with the refinancing activity plummeting by the end of the summer.
In Free Press interviews, owners and executives at mortgage companies and observers of the industry offered thoughts and theories about why mortgage businesses took off here and have continued to thrive.
Mortgages as manufacturing
Mortgage companies likely benefited from the presence of the automakers, which supported broad middle-class home ownership in the region and also set up their own consumer finance divisions. Each of the Detroit Three had ties to mortgage lending at some point, most prominently General Motors, whose former GMAC Mortgage Corp. was for years a nationally ranked mortgage lender.
Some also theorize that a manufacturing mindset carried over from autos to mortgages, helping the more innovative mortgage lenders in the region to get ahead. Quicken, UWM, Homepoint and Flagstar all saw growth as they developed and rolled out new processes for efficiently pulling together the many pieces of information needed for making mortgages.
“My thesis is if you think about it, southeastern Michigan is fundamentally a manufacturing hub, and especially predigital, (a) mortgage really is a manufacturing process,” Newman said. “It’s the accumulation of documents and data, and you assemble them, and you use that information to create the finished product, which at the end of the day is a mortgage for the customer.”
Quicken founder Gilbert forecast the revolutionary potential for such data assembly in the mortgage business back in the mid-1990s, when his company was called Rock Financial and wasn’t yet on the national radar.
In a 1996 interview with Crain’s Detroit, three years before Rock launched its direct-to-consumer website and started closing its physical branch offices, Gilbert predicted that the industry would stay highly fragmented so long as mortgage writing required a ton of painstaking document assembly.
“The problem with mortgage companies is a capacity issue,” Gilbert told the business tabloid. “You can only do so much with your infrastructure because it’s such a cumbersome process. … But once the technology makes it as easy to do as buying a hamburger, then you’re going to see some massive fallout and consolidation. And the companies that have invested in technology will be in a position to take major advantage.”
Just call Gilbert Nostradamus.
Quicken Loans, through its tech-enabled lending platform and online/call center operating model, went on to become the nation’s top lender, and was able to quickly ramp up capacity during the pandemic to take advantage of the 2020 refinancing boom, achieving a record $9.4 billion profit for the year for its parent Rocket Companies.
Work ethic, coachability
Several top mortgage executives cited a strong work ethic in southeast Michigan, which they said translates well for jobs in the mortgage industry.
“The work ethic in the Midwest is probably the best in the country,” said Daniel Milstein, founder and CEO of Ann Arbor-based Gold Star Mortgage, who immigrated to the U.S. from Ukraine as a teen and is also an NHL hockey agent. “People in Michigan — they’re hard workers, they’re easier to train, and overall that’s been very good for the lending industry.”
Another factor is that many jobs in the mortgage business can be learned through on-the-job training, and unlike fields such as engineering, they do not typically require advanced credentials or previous industry experience.
David Hall, founder of Hall Financial, said his hiring process is centered around four key attributes: a good attitude, strong work ethic, coachability and the ability to work with a team.
“You can teach people the subject matter, but it’s really hard to teach someone how to have a really positive outlook and a strong work ethic,” said Hall, whose 25-year career in the mortgage business included stints at Quicken Loans and UWM. “We have hired people who had industry experience. But generally speaking, we like to hire people and train them our own way.”
There also has been a history of innovation by southeast Michigan mortgage companies, giving them an edge over some competitors.
Quicken Loans, back when it was Rock Financial, in the early 1990s introduced “Rock Qualifax” so that loan agents could get instant mortgage pre-qualifications for customers via fax machine. In 1996, it rolled out a groundbreaking direct-to-consumer product, “Mortgage in a Box,” that was essentially an early paper-based version of today’s Rocket Mortgage website and phone app.
Flagstar Bank introduced its own automated underwriting and videoconferencing system in the mid-1990s that reportedly allowed for loan approvals in under an hour.
More recently, UWM in 2015 debuted its “Blink” technology platform that mortgage brokers say significantly simplified and automated the loan application process.
“There’s a lot of innovation around here,” UWM CEO Mat Ishbia said of southeast Michigan.
According to Ishbia, Michigan’s cost of living compared with more expensive financial services meccas is an advantage that can translate into lower loan origination costs. But cost of living isn’t the reason for the mortgage business, he said, because there are lower-cost states and such savings aren’t that important “if (employees) are not getting better and outperforming others and using technology to amplify it.”
Researchers say positive effects can arise when businesses in the same industry cluster together in close proximity, such as the exchange of innovative ideas and development of a big workforce with skills in a particular industry.
Matt Roling, executive director of the office of business innovation at Wayne State University’s Mike Ilitch School of Business, said southeast Michigan’s nationally ranked lenders are probably benefitting from being near each other.
For instance, Quicken Loans can motivate UWM to charge harder up the rankings and mortgage companies can benefit from the larger pool of skilled workers.
“When you have all this talent floating around the market, it’s real easy to kind of grab good people who, for whatever reason, might have fallen out with the big dog,” Roling said.
Phil Shoemaker, president of originations at Homepoint, echoed that assessment.
“When you have one company that starts to accumulate material scale, it does create a talent pool in the market that ultimately attracts more lenders,” Shoemaker said.
Three of the region’s four nationally ranked lenders are classified as nonbank lenders, as they don’t take deposits and rely on shorter-term borrowing for the money they use to make mortgages.
They also lack the safety lines banks have, such as access to the Federal Reserve’s “discount window” for emergency borrowing. Flagstar, the only bank in the group, started in 1987 as a savings and loan association, or thrift, known as First Security Savings Bank that focused on mortgages.
Another reason for nonbanks’ fast growth could be a reluctance by traditional banks to focus on just one area of their business, such as mortgages.
“At least in my experience, most banks that are diverse in their businesses, there is a limitation to how much they want to invest in any particular of those businesses,” said Newman of Homepoint, also a nonbank.
However, Wall Street rating agencies consider nonbank mortgage lenders to generally be higher credit risks than banks during times of economic stress.
“We have a lot of capital and a lot of liquidity because we’re a bank,” said Lee Smith, head of Flagstar Bank’s mortgage business.
Great Recession survivors
Of the three nationally ranked mortgage firms that were in business back then, all made it through the 2007-09 subprime mortgage meltdown and real estate market collapse. In the case of Quicken Loans, Gilbert has long insisted that his company never wrote predatory or improper loans and points to its survival during that turbulent period as proof.
“You have to look at it through the eyes of ‘would you loan your money.’ That’s how I ask people to look at it,” Gilbert said about subprime loans in a 2018 Free Press interview. “I remember our guys bringing us stuff, our guys being our bankers, saying, ‘Hey look, Countrywide is offering 100% loan-to-value loans for 580 (credit) score borrowers with no income verification. I said, ‘We’re not doing these loans.’ “
The same can’t be said for a cluster of now-defunct mortgage lenders in southern California that disappeared in the wake of the subprime meltdown. The biggest to go down was Countrywide Financial, based outside of Los Angeles, which collapsed into the arms of Bank of America at a fire sale price.
“That (area) kind of got the reputation as the subprime capital of the world,” said Brad Finkelstein, originations editor of National Mortgage News.
Flagstar did receive a $267 million government bailout through the Troubled Asset Relief Program or TARP, funds it repaid in 2016, and agreed to pay $110 million to settle a lawsuit that accused the bank of misrepresenting the quality of loans from 2006-07 in mortgage-backed securities.
Separately, the mortgage-lending division of what was GMAC, Residential Capital or ResCap, was known as an aggressive player in subprime mortgages. After the subprime bubble burst, losses at ResCap forced GMAC in late 2008 to transform into a bank holding company to be eligible for a TARP rescue.
The following year, the company renamed itself Ally Financial.
Ally ultimately repaid the $17.2 billion TARP money after its 2014 initial public offering.
Opportune timing also played a role in the explosive growth of some southeast Michigan mortgage firms.
Quicken benefited from the 2010-13 boom in mortgage refinancing after the housing market crash eliminated some of its past competitors.
And UWM benefited when large banks such as Wells Fargo and Bank of America decided to exit the type of business that it does, known as wholesale mortgage lending, in the wake of the housing crash. Wholesale lenders borrow money to underwrite loans made by independent brokers.
“The Detroit area right now is kind of the center of the mortgage universe,” said Finkelstein of National Mortgage News.