Residential Mortgage Finance: The Shift to Non-regulated SponsorsWILLIAM J. FERGUSON

Chief Executive Officer, Ferguson Partners

TRAVIS KONONEN

Managing Director, Ferguson Partners

RESIDENTIAL MORTGAGE FINANCE: THE SHIFT TO NON-REGULATED SPONSORS

2

The 2008 mortgage crisis and subsequent

downturn had far-reaching effects for the

entire financial system. US homeowners lost

a collective $3.3 trillion in home equity in

2008 and the stock market lost $6.9 trillion

in wealth that same year, prompting massive

regulatory and business overhauls.1

Many of the top mortgage lenders and

servicers before the crisis subsequently

disappeared or merged with stronger

competitors. Those that made it through the

market collapse saw shifts in how much they

were willing or able to lend.

Before the 2008 financial collapse large,

commercial banks such as Wells Fargo,

Citigroup, JPMorgan Chase, and Bank of

America dominated the residential mortgage

market. But many of these firms’ mortgage

units were scaled back post-crisis and

after the market collapse, faced increased

regulatory scrutiny and operating pressures

due to decreased volumes.

Consolidation in the market made room for

new, non-regulated entrants such as Quicken

Loans and other mortgage-specific lenders.

Often backed by private equity, these

companies didn’t initially have the benefit of a

diversified operating model and this singular

focus helped them come to dominate the

mortgage origination market.

1 http://www.businessinsider.com/2009/2/america-lost-102-trillion-of-wealth-in-2008

Shifts in the mortgage market

By 2016, six of the top 10 US lenders were

nonbanks, up from four in 2011.2 In 2011, the

three largest banks in the US at the time —

JPMorgan Chase, Bank of America, and Wells

Fargo — originated 50% of mortgages. By

September 2016 that had dropped to 21%.3

That opened the door for other lenders to fill

the gap, helping drive a tepid recovery in the

US mortgage market and overall economy.

The rise of nonbank lenders, those that only

issue loans and do not take deposits, can be

partially attributed to increased regulatory

oversight of banks. Rule changes and capital

requirements put in place as part of the

Dodd-Frank Act caused many banks to pull

back from offering mortgages. Those that

continued in the business tightened lending

standards, making it more challenging for

many to purchase homes.

Despite these changes, the shift to nonbank

lenders has far-reaching implications for the

financial system and how it’s overseen. More

lenders without the stability of a deposit

base could create problems if there’s another

downturn since many of these firms don’t

have a diversified enough balance sheet to

ensure stability.

2 https://www.washingtonpost.com/realestate/the-mortgage-market-is-now-dominated-by-nonbank-lend-ers/2017/02/22/9c6bf5fc-d1f5-11e6-a783-cd3fa950f2fd_sto-ry.html?utm_term=.6d067197c8b4

3 https://www.washingtonpost.com/realestate/the-mortgage-market-is-now-dominated-by-nonbank-lend-ers/2017/02/22/9c6bf5fc-d1f5-11e6-a783-cd3fa950f2fd_sto-ry.html?utm_term=.37f92d5ada47

FERGUSON PARTNERS | 3

How leadership and governance has shifted and become less diversified

One of the biggest benefits to come out of

the financial crisis is the strengthening of

corporate governance and transparency

at banks. But with many nonbank lenders

not subject to this scrutiny, examining the

experiences and backgrounds of executives

and Board members can reveal their strengths

and gaps in expertise.

The largest nonbank mortgage lenders —

Quicken Loans, PennyMac, PHH Mortgage,

SoFi, Caliber Home Loans, and LoanDepot —

are mostly run by a CEO or chairman with

extensive experience in mortgage origination.

Many of the leadership teams of these

companies have private equity, investing

and related experience, but do not have

diversified leadership teams and Boards, with

expertise across multiple functional areas,

such as technology and risk management,

nor multiple industries.

An analysis of the chief executives of these

top mortgage companies shows they have

backgrounds in areas including mortgage

origination. Most of the chairmen of these

companies have experience in investment

management, venture capital or private

equity, providing a solid financial background

for these nonbank lenders.

However, only two of the top nonbank lenders

list a chief risk officer or compliance head on

their websites or in filings. Few have Chief

Operating Officers or Chief Financial Officers

with diversified industry experience.

Reviewing those on the Boards of these

companies also reveals a bias toward

investment management and private equity.

While several do count Board members from

outside the industry, the majority of those

overseeing these nonbank lenders have

similar backgrounds and experiences.

Lack of diversity and Board oversight can

lead to problems. For example, lender SoFi

ousted CEO Mike Cagney for inappropriate

behavior in September 2017. The allegations

of misconduct were initially raised to the

Board in late 2012, according to The New

York Times.4 Cagney is also under scrutiny

for making false statements to investors.

Many of his initiatives, such as expanding

internationally and into asset management,

have been put on hold.5 The firm also

abandoned plans to become a deposit-

taking bank, which was opposed by several

consumer groups.6 Sofi’s Board has been

criticized for its lack of oversight, governance

and misguided strategy, and it is currently

working to find new leadership for the firm.

4 https://www.nytimes.com/2017/09/12/technology/so-fi-chief-executive-toxic-workplace.html

5 https://www.bloomberg.com/news/articles/2017-11-09/sofi-posts-record-quarter-but-pulls-back-expansion-amid-scandal

6 https://www.wsj.com/articles/fintech-firm-sofi-drops-plan-to-open-a-bank-1507917648

RESIDENTIAL MORTGAGE FINANCE: THE SHIFT TO NON-REGULATED SPONSORS

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Conclusion

Many of the executives running the nation’s

largest mortgage lenders have backgrounds

in investment management or mortgage

origination. Overall, the Boards and leadership

teams of these companies are made up of

executives from private equity firms as well

as others with similar mortgage and Wall

Street backgrounds. Probably not a great

formula for success, as we witnessed in 2008!

While a few list risk management among

their executive ranks, or Chief Operating

Officers or Chief Financial Officers with

diversified industry experience, many of these

companies could benefit from broadening

their executive ranks and Boards to include

those with experience in other industries and

different functional disciplines.

Boards should look to add expertise from

industries focused on risk management. While

many of the teams have people in these

functions, having more diverse experience from

other industries would help implement best

practices, institute more controls, and help avoid

potential overleverage in the mortgage market,

like we saw before 2008. This could help stop

systemic problems before they spread.

FERGUSON PARTNERS | 5

Travis Kononen is a Managing Director at Ferguson Partners.

He specializes in the REIT, real estate private equity and

investment banking sectors, executing mandates in the US, UK,

and continental Europe. Mr. Kononen furthermore maintains

close links with INSEAD and the London Business Schools’ real

estate programs. Prior to opening the San Francisco office, he

spent six years in the firm’s London office, and three years in the

New York office.

Mr. Kononen has a degree from Oregon State University.Travis Kononen

Manging Director

Ferguson Partners

+1 415-874-3160

tkononen@fergusonpartners.com

WILLIAM J. FERGUSON

Chief Executive Officer

Ferguson Partners

+1 312-893-2339

wferguson@fergusonpartners.com

Mr. Ferguson serves as Chairman and Chief Executive Officer

of Ferguson Partners and as the Co-Chairman and Co-

Chief Executive Officer of FPL Advisory Group. Mr. Ferguson

conducts senior management recruiting assignments, with a

specialization in president/chief executive officer searches

and recruiting assignments for Boards of Trustees/Directors.

He also facilitates public company Board assessments and

senior management assessments.

Before founding Ferguson Partners, Mr. Ferguson was a

Managing Director with one of the leading international

executive recruiting consultants. There, he co-managed the

firm’s national real estate practice. Prior to focusing on real

estate, Mr. Ferguson worked for General Mills, Inc. in Minneapolis

in strategic marketing.

Mr. Ferguson holds a Bachelor’s degree from Harvard University,

where he was a member of Phi Beta Kappa, and an MBA in

marketing from the Wharton Graduate School of Business.

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© 2017 FPL Advisory Group. The Ferguson Partners recruitment practice consists of five affiliated entities serving FPL’s clients around the world: Ferguson Partners Ltd. headquartered in Chicago with other locations in New York and San Francisco, Ferguson Partners Canada Co. in Toronto, Ferguson Partners Europe Ltd. headquartered in London with a Japan branch located in Tokyo, Ferguson Partners Hong Kong Ltd. in Hong Kong, and Ferguson Partners Singapore Pte. Ltd. in Singapore. Ferguson Partners Europe Ltd. is registered in England and Wales, No. 4232444, Registered Office: 100 New Bridge Street, London, EC4V 6JA. Ferguson Partners Singapore Pte. Ltd. is registered in Singapore, Business Registration No. (UEN) 201215619H, Employment Agency License No. 12S6233. FPL Associates L.P., the entity which provides consulting services to FPL’s clients, is headquartered in Chicago.

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