Dan Gilbert's Quicken takes on big tech after beating the banks

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Billionaire Dan Gilbert's Quicken Loans Inc. outgrew almost every U.S. mortgage provider by unfurling technology like its online Rocket Mortgage platform faster than big banks.

Now closing in on the industry's leader, Wells Fargo & Co., he's picking more fights: Luring top tech talent to Detroit from Silicon Valley giants like Facebook Inc. and Google.

"Everything is about innovation, creativity, newness, trying to keep the culture non-bureaucratic," Gilbert said in a phone interview. "To me, that's how you compete in the world today."

Gilbert, who owns 77% of the mortgage lender he founded more than three decades ago, boosted stock awards to employees 56% to $1 million during this year's first nine months, according to a marketing document for a $1 billion bond sale this month. The closely held firm runs an internal system that lets recipients — many of them technology recruits — eventually cash out their equity.

Gilbert is counting on creative millennials, who he said "love that Detroit thing," to be drawn to a city with an underdog mentality and a dirt-cheap cost of living compared with Silicon Valley. Estimated to be worth $8.5 billion by the Bloomberg Billionaires Index, he's been a big investor in Detroit and Cleveland, where he owns real estate, casinos and the Cavaliers basketball team.

Even in a rough year for mortgage providers, Gilbert has invested aggressively. Spending on tech staff contributed to a roughly $50 million increase in compensation costs and an 8.6% increase in total expenses in this year's first nine months, according to the bond document obtained by Bloomberg. Companywide, net revenue fell 5.1% and net income tumbled 38%. By contrast, mortgage-related revenue fell 27% at Wells Fargo and 75% at Bank of America Corp. as a refinancing boom ended.

As a closely held firm, "we have that luxury of just investing back in" instead of constantly worrying about earnings targets, Gilbert said. He said the firm's culture adheres to Amazon.com Inc. founder Jeff Bezos' philosophy of staying in "Day 1" mode – pushing itself to behave like a startup.

Tech know-how has enabled Quicken to close loans faster and more profitably than banking rivals. It typically funds loans about 33 days after applicants upload their information.

Quicken has an average gain-on-sale margin of about 4.1%, according to the bond document. The broader industry booked a 1.3% effective margin in early December, according to a Mortgage Bankers Association proxy for gains on such sales.

Gilbert founded Quicken in 1985 as a local mortgage bank and transformed it into a national online lending business. While banks typically hold at least some mortgages on their balance sheets, Quicken makes loans almost exclusively through its website and call centers and then sells them.

About 2 million people have used Rocket Mortgage, which lets people apply for mortgages on their smartphones. The company advertised the product in a 2016 Super Bowl commercial, bought leads from aggregators such as LowerMyBills.com and sponsored a Nascar racing team.

Wells Fargo is piloting a digital application for release next year, and in August it partnered with Blend Labs Inc. to move more forms online. Still, Gilbert said he's confident that Quicken can catch up to its loan volume.

"We'll be the largest retail market share lender within a short period of time," he said. A Wells Fargo spokesman declined to comment.

The company employs 12,000 people. About 1,900 focus on technology, including 500 who develop software.

"I don't think you can overspend on great technology people," Gilbert said. "If there were 500 of them that walked into our door tomorrow and they were all proven to be top notch, I'd hire them in two seconds." He would do that, he said, "whether we needed them that minute or not."

Its growth hasn't come without turmoil. Quicken has been feuding with the Department of Justice for years over mortgages backed by insurance from the Federal Housing Administration. In 2015, the U.S. accused the company of falsely certifying loans that weren't FHA compliant between 2007 and 2011. Quicken has said the assertion is based on a "cherry-picked" sample.

Many other big lenders settled similar claims. Gilbert, who says his firm has made about a half million FHA loans, said he's not interested.

"You had a very aggressive DOJ decide several years back to put the largest lenders of FHA on a board, and say, 'Let’s go after them,'" Gilbert said. "When we start to treat the good guys and the bad guys the same, then that's a real problem."

Quicken has reserved $10 million to deal with the legal issue – unchanged since at least 2015, according to the bond document and a similar 2015 document. Gilbert said he's "very confident" that will be enough.

He said he's also unfazed by a clause in the Republican tax overhaul that President Trump signed last week, capping the mortgage-interest deduction at $750,000, instead of $1 million. The change may cost home buyers in areas with high property values, such as parts of California and around New York City.

But few people are going to decide against buying a house because they can't get the larger deduction, he said. "It's not affecting a huge chunk of America."

Bloomberg News
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