Some Lenders Gain When Another Falls

When a mortgage company fails it's generally a sad event - unless, of course, the lender was abusing its customers, flouting the rules and becoming (over time) a candidate for the "too problematic to survive" category.

Lend America bit the dust two weeks ago and it has now garnered more media attention over that time than it did during the 20 years or so it was in business. But, let's face it: when a company collapses it's a story, especially when 600 workers lose their jobs right before Christmas and the top dog has a criminal record. It also makes good copy that former New York Mayor Rudy Giuliani was called in by the company to put out the fire but failed. (The story gets even spicier when 100% of the loans they were funding are backed by Uncle Sam via the booming FHA program.)

But there's a different story to tell about Lend America this week and it has to do with opportunity. Advisors to the company, former employees and competitors say some Lend America workers are busily shopping themselves to competitors as a team. What's in it for the competitor? Answer: Gaining a wealth of experienced people who know the FHA business inside and out. Don't get me wrong. Melville, N.Y.-based Lend America was no angel when it came to FHA underwriting - that's why commissioner David Stevens shut them down. But a close review of the charges filed against them reveals that its problems were concentrated in its 2006 and 2007 book of business and if you believe the statements made by company EVP Michael Ashley (the one who copped a plea last decade), its downfall was caused by a handful of bad apples who were fired long ago.

If you take that at face value, you can safely assume, perhaps, that among the 600 or so displaced workers there are many valuable employees looking for a home. But for mortgage bankers who operate in the area it also means something more important: a $2 billion to $3 billion a year originator of FHA loans is out of business and that means mortgage customers need a place to land. Lend America's death is potentially their gain.

Michael McHugh, CEO of Continental Home Loans, said his company is seeing displaced Lend America applicants walk through his doors. (Like Lend America, Continental is based in suburban Melville.) "We're seeing some of their customers, yes," said Mr. McHugh. "They're calling us up in a panic. Their funding source has gone away. They don't know what to do."

Kenneth Doepp, an account executive at Franklin First Financial in nearby Hauppauge, also has seen more business thanks to the company's demise. "We're working with customers and Realtors on some of their deals," he noted.

Several national lenders such as Wells Fargo and Bank of America play in the Long Island market but when it comes to market share, Continental, according to HUD, ranks first. Mr. McHugh is considering hiring some of Lend America's former employees, including those with secondary market, sales and processing experience.

A veteran mortgage banker, he has been in the business for more than two decades, seeing boom-and-bust cycles before. A nonbank, FHA/GSE lender CHL originates upwards of $1.5 billion a year through seven retail branches. Even though his company, for now, is benefiting, from Lend America being shut down, he does have one concern: available warehouse credit.

"We have warehouse lines," he said, feeling confident that CHL is in decent shape but worries about providers like National City, which is owned by PNC Financial. PNC plans to shut the NatCity warehouse unit by midyear. (See related story in this issue.) "I don't get it," he said. "It's a good business for them and they're closing it."

Lend America, on the other hand, didn't want to close but was forced out of business by the government. Welcome to the "new normal."