July 20, 2024
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July 20, 2024
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Linking Northern and Central NJ, Bronx, Manhattan, Westchester and CT

It was 4:00 AM on January 17, 2008, a day after my birthday, when I was awoken by lots of buzzing emanating from my phone. Lehman Brothers, the fourth-largest investment bank in the United States, was immediately shuttering its entire mortgage operations. A few months later, the 161-year-old firm declared bankruptcy and became synonymous with the “Subprime Meltdown” – along with Countrywide Home Loans, which was “bailed out” by Bank of America just a few days prior.

Unfortunately, we did business with both of those leading secondary mortgage-market giants – a lot of business with them. The terror of those days was indescribable. By then, we had already seen over two hundred mortgage companies that had closed their doors permanently. There were some “big names” amongst the list, but Countrywide and Lehman were two of the pillars of the market during those days, and it put the entire mortgage industry in complete panic.

Let me take you back to 2006-2007. In a few short years, I had grown the company from a small one-office family brokerage with a handful of employees to a nationwide lender with offices in over 20 states. Our company had tremendously expanded, and we were on pace to originate over a billion dollars in mortgages on an annualized basis, with more than 120 employees.

In late 2006, my wife and I bought our current home. I waited until after the closing to congratulate us but quickly declared that home prices would soon plummet. Industry leaders knew the market was out of control, but no one realized the widespread extent of the damage and how far it reached.

That said, I was comfortable with our business, knowing that our overall “Subprime” clientele was negligible. We only did a handful of “option arm” loans – but only to well-qualified borrowers. Those option arm loans were the truly toxic loans with negative amortization, causing the mortgage balance to increase with each passing month. We had just gone through an audit from the state banking department, and they commended us on our policies, prudence, and discretions. The bank examiner even offered to do his loan through our company if the department would permit him to do so.

Throughout our growth, we were overly vigilant, adding our own level of restrictions and stringencies before it was even deemed necessary. We lost many opportunities to expand even further because loan officers didn’t want to work for Approved Funding, as our reputation was that of being overly conservative. I recall conversations with some of our bankers and investors who would joke about us, “if you don’t have any buy-backs, that means your not doing enough business!” I was very comfortable with the quantity of business we were doing and even more content with the quality we adhered to, at a time when “anything” was permissible.

If you don’t know the mechanics of “mortgage banking” by now, let me give you a brief overview. A Direct Lender is a company designated (licensed) by the regulators as a “mortgage bank” that can fund loans using their own capital, as well as with lines of credit from participating banks (and wall street companies). These loans are accumulated and then sold (often in “bulk”) to investors in the secondary market, who would then securitize them into pools of bonds.

At the time, our business model was simple. We had loan officers working out of numerous branches throughout the U.S. who would directly deal with borrowers at a local level. Still, all of the underwriting and compliance took place via the corporate office here in New Jersey. The centralized back-office allowed us to maintain our quality control and make sure we were only lending to people who demonstrated the ability to repay.

Of course, we utilized the available “streamlined” documentation relief, so many of our loans were sold into the “Alternative” mortgage market, which was dominated mainly by the wall street powerhouses. If you are interested, the 2015 movie “The Big Short” gives a very realistic overview of the marketplace at the time.

The last few months of 2007 were highly tumultuous, with loan defaults starting to rise and interest rates beginning to spike. Again, we further curtailed our business and made sure to vet any limited documentation loans we were funding carefully. Unfortunately, after the Countrywide and Lehman announcements, the mortgage market imploded rapidly.

Let me paint a picture of what we were experiencing from the inside. We had loans that we carefully approved and proceeded to close (and fund) with the intent to deliver them to our investors. It generally takes a few weeks from when we fund a loan, placing them on our balance sheet, until our investors purchase it. Once our investors buy the loan, they replenish our funds and repay our credit lines.

To our horror at the time, we funded about $5 million in mortgages that were supposed to be sold to Lehman Brothers. We quickly scrambled to look for alternative buyers, but the market was imploding before our eyes. Investors were canceling commitments and changing guidelines faster than we could get someone on the phone. Within a few hours, the five million in mortgage loans were effectively worth 2-3 million – and were deteriorating fast. A company of our size could not sustain such significant losses.

We started to dissect the loans, one by one, to see how they could be restructured and sold individually to mitigate our losses as much as possible. We were able to sell many of them successfully, but a few could not be salvaged. The losses would be severe. We decided to reach out to each of the borrowers personally to explain the situation and renegotiate new loan terms. It was during those few days, amidst the hell of the time, despite our best efforts to do sensible loans – I realized our big business flaw.

Our calls and efforts were futile. These borrowers felt no obligation or compassion to help us in any way. They called for a loan, we spit out our rates and fees, and they accepted our terms. Our interaction was a mere emotionless “transaction.” Simply put, we had no relationship with these people.

As we worked through the loans and attempted to curb our losses, I had an epiphany. If and when I should ever get out of this mess, my entire business outlook and philosophy would change. I vowed to stop being an “order taker,” and become a true expert in my field. I would provide genuine value and expert guidance to each of my clients. I would focus on quality over quantity and truly be attentive to the needs of my customers, building a referral-based business – one loan at a time. And that is how it began…

Shout out, and a special thank you to The Schechter, The Crystal, and The Stein families for their generous hospitality to our minyan for the past year-plus.

Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved funding is a mortgage company offering competitive interest rates as well as specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected].

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