Forward on Reverse ... The Zero-Payment Home Loan

Forward on Reverse ... The Zero-Payment Home Loan

May 31, 2004

An Interview with Vanguard National Mortgage and Title CEO Michael KnightMortgagePress.comMichael Knight, Colorado Associaiton of Mortgage Brokers, Vanguard National Mortgage and Title, affiliated business partnerships, warehouse lines, HUD Proposed Rule
Vanguard: A Partnership Sharing the Wealth
The Mortgage Press: Mike, can you give us your
background and a brief history of your company?
Michael Knight: I started in this industry in 1977 and now have two
mortgage companies located in Denver. I started my current
companies out of my basement in early 1996, and we now have 33
employees, including our title company, with 10 originators. I was
out of the industry from 1980-1996, and was with Merrill Lynch the
bulk of that time as a stockbroker, commodities trader, and a
financial and estate planner. The call of entrepreneurial
enterprise and the stock market crash of October 1987 are the
reasons I eventually left Wall Street activities. The natural thing
for me to do was reenter the mortgage industry.
TMP: You caught my attention at the Western Regional
Mortgage Brokers Convention in Las Vegas the last two years. I
noticed that Vanguard is also a National Association of Mortgage
Brokers Gold Industry Partner for 2002 and 2003, and is planning
another splash at the NAMB Annual
Convention this June in Baltimore. I guess you are ready to go
mainstream with your concept? Can you explain the basic idea of the
MK: It is the first national mortgage and title partnership. It is
owned by Mortgage Brokers, and the real estate agents and builders
with whom they work. This is known as an Affiliated Business
Arrangement (ABA) under the Real Estate Settlement Procedures Act.
There are many small ABAs around the country, but we are the first
to scale out the model into a national partnership.
TMP: A national partnership?
MK: A partnership business model is nothing new. Large accounting
and legal firms have used this model for decades. We formed a
strategic alliance with Deloitte & Touche 18 months ago, and
one of the values they passed on to us was a clear understanding of
their model. The time is now for that model in the mortgage
TMP: What advantages are there to becoming a national
MK: There are powerful economies of scale and other efficiencies
that can be brought to bear in the mortgage brokerage industry
because of the very large volume of business we do collectively. By
most measures, brokers originated around 70 percent of all
mortgages in 2002 in a $2.5 trillion market. That is market
domination, yet we each operate independently. Not only is this
terribly inefficient, it also means we pass up significant sources
of revenue on every loan.
TMP: Most Mortgage Brokers just had several record years
in a row. You might get an argument from them that they are already
pretty successful and efficient.
MK: Yes, we all just had record years, thriving and working in an
incredibly lucrative industry. But cash flow alone is a very
one-dimensional measure of efficiency and success. What I am
referring to is the creation of value; an asset with liquidity for
retirement. The current model in the industry only provides cash
flow, but has little accrued value or liquidity.
TMP: I don't follow where you are going with
MK: Let me put it this wayin many other industries and businesses,
let's use a hardware store as an example, when a business owner
ends their career, they have a business they can easily sell. This
is usually a significant part of their retirement nest egg.
Mortgage Brokers usually cannot sell their businesses because they
are relationship-based. Would you buy a business, knowing that the
relationships on which it is based will inevitably realign
themselves with another known source when the previous owner who
built the relationships, leaves? You cannot simply transfer a high
percentage of relationships cultivated over time with real estate
agents, builders and past clients. This is what I mean when I say
broker/owners have no liquid or accrued asset to sell for
retirement. There is intrinsic value there, but only to the owner.
I don't like the cash flow-only, one-dimensional model we have all
assumed for years is the only way, so we began operating an
improved model, changing and tweaking it along the way over the
last seven years. The marketplace has indicated it is a great idea,
and its time has come!
TMP: How has the market "indicated" to you that this is
a good idea?
MK: Well, we very quietly have hand-picked 30 founding partners
(FPs) in 20 states to be the initial group that we start operations
with in March/April 2003. We raised $7.3 million to acquire these
companies and build the systems, processes, and the technology to
make this operational. These FPs are typically very established and
successful broker/owners who took a look at the model and said,
"Count me in."
TMP: You said something earlier about running this
business concept for seven years?
MK: Yes. I knew a conservative mortgage industry would be slow to
embrace a new model unless we first tested out and proved the
model. This "pilot program" we operated grew at a 25-percent faster
compound annual growth rate than our traditional mortgage shop. The
marketplace not only accepted the new model, but embraced it with a
vengeance! We are now scaling out the model into a national
TMP: What exactly is the model, and what makes it so
MK: The basic tenets of our model are a roll-up or aggregation,
creating a national ABA, with resulting conduit pricing, new
channels of revenue for brokers, bundled services and empowerment
through mutual ownership with a common goal. We have spent a great
sum of money over the last seven years with RESPA and SEC attorneys
to make sure our model is compliant with RESPA and securities laws.
We've also engaged a corporate financial planner who caught my
attention in September 2000 at a seminar titled, "Alternative Ways
to Finance Growth." That topic made me sit up and take notice,
because I had been looking for two years for an individual of this
caliber with the right ideas and experiences. He outlined eight
success stories he had pioneered in the last 10 years with various
companies. One of them had remarkable similarities to the mortgage
industry and their business plan was uncannily similar to mine. He
likes to say that he takes small companies with big ideas and turns
them into whatever size enterprises they want to become. Many of
them wanted to go public and he has successfully directed a number
of companies down this path to IPOs. You might say he is "access to
capital," whether that means through private sources or Wall
Street. He has been featured on the front page of The Wall Street
Journal, in Forbes magazine, along with a number of other
well-known publications, and is known as "the Deal Maker."
TMP: Who is this mystery man?
MK: He is a corporate financial planner: Gordon Tunstall of Tunstall Consulting.
A Certified Public Accountant, he has a banker's background, is
more than capable of being a CFO for a large corporation, sits on
the Board of Directors for several companies, and is well-known in
financial circles and with Wall Street investment bankers. When he
brings a deal to the table, they take notice because of his past
TMP: You mentioned he had recent success with a company
in another industry but with very close similarities to the
mortgage industry. Can you elaborate?
MK: Yes. The orthodontic industry was quite fragmented, and each
orthodontist thrived on a relationship-driven business, and spent
their own dollars on advertising and supplies. They had a business
they could not sell, in spite of considerable cash flows generated.
In short, no synergism, no economies of scale, no strength in
numbers, and an incredibly inefficient business model other than
cash flow. As I sat and listened to this success story, I sat up in
my seat knowing I had found my guy, because he had implemented my
business plan in another industry resulting in a huge success, all
the way to an IPO. He had the template, all we needed to do was
adapt it to the mortgage industry and hit the ground running. I
engaged him in October 2000, and he has pushed me hard, dotting the
Is, crossing the Ts, and making sure that we are compliant with
RESPA and SEC regulations.
TMP: That's quite a story, and its a bit fortunate for
you that you stumbled across this guy. How is it
MK: Well, I'm a believer that things happen for a reason. Yes, it
was pure serendipity that I was invited to this seminar where
Gordon spoke, but it was his topic that grabbed my attention. I
said I'd been looking for two years for someone who could get me
access to capital for aggressive growth and could crystallize my
business plan. I am a patient man, but I like to think of myself as
opportunistic when the right opportunity falls into my lap! He has
pushed me hard and has me on a timeline for various goals at each
step in our master plan.
TMP: Let's go back to something else you said earlier.
You referred to the mortgage industry as an "emerging" market.
Mortgages have been around for a long time. Why do you refer to
this as an emerging industry?
MK: Mortgages have indeed been around for a long time, but as
Mortgage Bankers working for one company. Up until the Savings
& Loan debacle of the 80s, people went to either their local
S&L or bank to get a home loan. Then S&Ls imploded. In the
80s and 90s, two really strong trends emerged in U.S. business.
Self-employment and home-based businesses. Most brokers started out
from their homes, and many of us grew into commercial office space.
These two trends, along with the demise of the S&Ls, allowed
the brokerage industry to emerge with very lucrative,
entrepreneurial opportunities. Our industry has sprung from nowhere
20 years ago to capture nearly 70 percent of all originations in an
enormously large industry. When any industry goes from zero to 70
percent of the market share in such a short period of time, there
are bound to be inefficiencies in the model. In our case, the
shortcomings are on almost all fronts. This causes each of us to
spend much more than is necessary for everything we do and to leave
much higher margins on the table with every loan we do. Our model
is a large partnership that harnesses the incredible "buying" power
to each of our advantages. In other words, the model captures the
power and efficiencies of a larger group, turns them into savings
for each mortgage owner, and adds 30 percent to 60 percent more
profit to each loan we do! Those added profits are then leveraged
and passed on to each owner. None of these remarkable dynamics can
be achieved as an individual owner. Individually, our voice
(measured by the volume of business) is just another tiny
originator existing in a $2 trillion-plus market!
TMP: How does the new HUD Proposed Rule affect your
MK: While I disagree with most of the Proposed Rule, because it
places Mortgage Brokers at a disadvantage, the HUD proposal really
plays right into our model. If it passes, brokers will have to
become bankers to survive, and out of the four ways you can become
a banker, the Vanguard model offers the greatest benefits by far.
If this rule passes, there is going to be a huge demand by brokers
to become bankers, and we are poised to take advantage of that. We
obviously knew nothing of the HUD Proposed Rule as we developed the
model over the last seven years, but it could dramatically
accelerate the growth forecast in our business plan.
TMP: What four ways of becoming a banker are you
referring to?
MK: First, get a warehouse line. Sounds easy, but you must have
good credit, the net worth, and the expertise to run one. Second,
join a co-op, but co-ops offer limited upside potential, require a
buy-in and dictate that you come in with your own warehouse line.
Next, join a net branch. Again, there is limited upside and you
still are not building any net worth under this one dimensional
model. And finally, join the only partnership model in the
marketVanguard. It harnesses the best of the co-op and net branch
features and includes a warehouse line. Everyone owns stock in the
company and accrues more through the stock option plan over time.
If the economy and the markets cooperate, we may seek to take the
company public creating that exit strategy I mentioned earlier. One
never knows!
TMP: How do you think the mortgage industry will receive
MK: As I said earlier, we have shown the model to a very limited
number of owners and hand-picked our initial group. Many have told
us they thought of this before or had tried to do this on a smaller
scale in their own city with a few mortgage colleagues, but
couldn't quite figure out how to bring it all together. The initial
idea was mine, but by surrounding myself with some pretty bright
"idea people"attorneys and consultantsthe model blossomed into our
current concept! The few owners who have seen it have stated, "It
is an idea whose time has come!"
TMP: You mentioned earlier a "master plan?" What is your
MK: Easy. To become the largest single originator in the U.S. and
deliver considerable value to each partner, unattainable as
stand-alone businesses.
TMP: Sounds like you are in the right place at the right
MK: I agree! We are most anxious to see 2003 unfold after seven
years of preparation!