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
4
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
WILLIAM J. FERGUSON
Chief Executive Officer
Ferguson Partners
+1 312-893-2339
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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