A simply exceptional approach to the broker communityStacy Miller and Eric C. PeckThornburg Mortgage, Garrett Thornburg, Larry Goldstone, adjustable-rate mortgage Getting to know Thornburg Mortgage Santa Fe-N.M.-based Thornburg Mortgage Inc. (NYSE: TMA), has been in existence for 14-plus years, originally opening its doors in 1993 as a blind pool public offering—a limited partnership that is set up for investment, but doesn't specify what specific assets the general partner plans to invest in. Founded by current Thornburg Mortgage Chief Executive Officer Garrett Thornburg and President and Chief Operating Office Larry Goldstone, the company was created to invest in the adjustable-rate mortgage (ARM) market, specifically in mortgage-backed securities. The company later began buying into bulk pools of adjustable rate mortgages, and in 2001, opened a correspondent lending channel. More recently, in 2006, Thornburg Mortgage expanded again with the opening of a broker channel. The Mortgage Press recently had an opportunity to sit down with Thornburg Mortgage executives Joseph Badal and Michael McMinn to discuss the company's growth, its unique niche of super jumbo product offerings, its target audience of the sophisticated borrower, and its interest in expanding its relationships with Mortgage Brokers. Joseph Badal, Thornburg Mortgage senior executive vice president and chief lending officer, has a broad-based background in mortgage banking, finance and real estate operations. In addition to his work with Thornburg Mortgage, Badal is an accomplished author, having written dozens of bylined articles for a number of financial planning and mortgage industry publications, and has penned two published suspense novels, The Pythagorean Solution and Terror Cell. Michael McMinn, Thornburg Mortgage's national broker sales executive, joined the company in May of 2007 to head up the national expansion of Thornburg Mortgage's broker origination channel. McMinn has 25-plus years of mortgage experience, having held a number of positions including vice president of wholesale lending for western division of Wells Fargo/Norwest Mortgage. He exited retirement a few months back to join the Thornburg Mortgage team. TMP: How would you describe, individually, your background in the mortgage industry and how you got into it? Joseph Badal: I came out of the banking and finance industry. I actually started in commercial banking in 1972, was exposed to commercial mortgages through that experience, and then got into the residential mortgage business, approximately 15 years ago., I ran the mortgage arm of a bank for 7.5 years and then joined Thornburg Mortgage five and a half years ago as a full-time employee. My relationship with Thornburg Mortgage actually began in 2003 as one of the founding directors of the company. Michael McMinn: My career spans more than 28 years in the wholesale industry. My responsibilities have included opening wholesale branches, managing regions and developing divisions. My duties have included managing operational and sales platforms for major wholesalers in the West. Most recently, I was with Wells Fargo for 15 years—running operations and sales in their western division. I retired from Wells Fargo in January 2006 and was recruited out of retirement by Mark Plasters [executive vice president and national sales manager for Thornburg Mortgage]. He asked me to consider getting back in the mortgage industry to help develop the companys wholesale channel. TMP: How did the company select the niche of super jumbo mortgages and the high-end borrower? What was the deciding factor to make that your target audience? JB: Initially, we went after the adjustable-rate mortgage [ARM] side of the business. We were one of the first companies to offer an interest-only product. You know, it's interesting, if you look back on the history of the interest-only product, it was really created to help the first-time homebuyer. If you recall when Jimmy Carter was president of the United States, we had high interest rates and the interest-only ARM loan became a popular product for helping first-time buyers get into a home. It's been kind of interesting, as time went by, the product evolved into more of a part of a financial planning process for more sophisticated borrowers. We found that the prime borrower and prime jumbo borrower were more interested in and more capable of managing an interest-only loan than a first-time homebuyer was. We found that there was a niche there that was not being served. We researched the space and determined that no one really owned the prime jumbo market—particularly the super jumbo section of that market. We spent more time and more of our marketing and advertising efforts in that arena. Our portfolio has evolved over the last few years, with our average loan amount increasing from approximately $350,000 to almost $1 million today. TMP: Thornburg Mortgage was always known as a company that dealt with correspondents. From what I understand, you would buy pools from wholesalers that are out there, and in 2006, you went directly to the brokers. What brought about that change? JB: We had always talked about providing our products to brokers, but our policy here is extremely disciplined and very conservative. What we wanted to do was make sure that we had systems in place that would be able to support the correspondent side of our business, and then we started building systems to support the broker side. The main reason that we decided to do business with the broker community is because they represent more than 50 percent of all of the loan originations made in this country. We built up a strong base in the correspondent channel and decided it was time to solicit business from brokers. I think that we've made a great start in accomplishing that over the last 15 months. TMP: How have your correspondents felt about you taking the products that they used to have exclusively and delivered them directly to brokers? JB: We have had maybe three or four correspondents get heartburn over our entry into the broker channel. We're not doing anything that every other investor isn't already doing. Our correspondents tend to be very sophisticated, very successful businesspeople, and they understand the concept of running and growing a business. We have a very service-oriented approach here that is so hands-on that, even though there has been some loss of exclusivity in some of these markets for our correspondents, the level of service that we provide to our correspondents is so high and so personal that it is very hard for a correspondent to say, "I'm not going to do business with Thornburg Mortgage anymore because they're doing business with brokers. TMP: How are the relationships with the individual brokers established with your account executives? Is it a dedicated account executive that has the relationship, or is there support staff under the account executive that the broker is able to deal with on an exclusive basis? MM: I'm a firm believer, because of Thornburg Mortgage's high-quality lending philosophy, that we thoroughly interview each broker prior to us providing them a broker package and inviting them to be a client. In almost any location a broker has a shop there is a Thornburg mortgage AE [account executive] who would be assigned to that broker. The AE conducts a standard 60-minute interview with any potential new client. If the AE, in his/her opinion, feels there's a good fit between the prospective client and Thornburg Mortgage, the AE will try to determine from the client the nature and scope of business the client expects to send our way. It's really the AE's responsibility to identify these brokers and then build a relationship. We're looking for relationships, not just transactions. It is important for our AEs to determine early in the interview process what Thornburg Mortgage can bring to the broker that will assist the broker in building his/her franchise. Through quality service and an innovative line of products, we want to differentiate ourselves from all other mortgage investors, and help the broker to differentiate him/herself from the competition. TMP: During that interview process, is there attention in terms of due diligence as to the acceptability of that broker in terms of their relationship with their regulatory agency, questions regarding fraud, and so on? MM: Absolutely. Compliance is a big issue with any lender today. Not only is there an interview, but we also conduct a site inspection. The AE tours the office, takes a look at how the broker shop is set up, what their processes are, what their compliance procedures are, how they attempt to identify fraud, etc. We also run background checks on the broker to make sure they are in good standing. We feel that by the time we execute that relationship with the broker and have provided them with a broker package, we've become comfortable with the broker and feel that the potential for a true relationship is high. TMP: One of the things you may have a possibility of experiencing more than others when dealing with the affluent, sophisticated borrower is the ability to be more sophisticated in their ability to commit fraud. Has fraud been a major problem and what steps do you take to avoid fraud? JB: We have basically applied the same approach to the broker channel that we have with the correspondent channel. As Michael mentioned, the first part of preventing fraud is making sure that you work with the right lending partners. We're very careful about the correspondents and brokers who we do business with and have a very intense and detailed due diligence process in checking those partners out. The second thing we do is underwrite all of the loans ourselves. Our underwriters are very experienced. Our average underwriter has 22 years of underwriting experience. Each of them is trained by our department manager to approach the underwriting process from a point of view that is unique to Thornburg Mortgage. Also, all of our loans go through a quality control [QC] process, which is performed by Adfitech in Edmond, Okla. TMP: How do you train your staff? Are there any mandatory training programs as you bring in additional personnel? How do you get them to come up to speed with the corporate culture and goals of Thornburg Mortgage? JB: When we acquired Adfitech, we created an underwriting center there in Edmond, Okla. that caters to most of the broker channel clients. The Adfitech underwriters train in Santa Fe, learning how Thornburg Mortgage underwrites loans, getting to know the people and basically sharing one another's cultures. When we work with a vendor, whether it's a servicing vendor, a fulfillment vendor, or a QC vendor, we make sure that their contacts with our customers or lending partners are seamless from the standpoint of no drop in quality and service. Sophisticated, affluent borrowers expect a different level of service. So do the lenders that represent these borrowers. We are committed to providing that type of high-level service. For instance, our brokers can talk to our underwriters; we do not create barriers between our underwriters and lending partners. We want the underwriters to be available to those partners—to answer their questions and to review "what if" scenarios. We have what we call a "common sense" approach to underwriting our loans. For example, a borrower may have multiple investment properties. As a result of loans on those investment properties, because of the concentration of debt, the borrower's FICO score may be depressed. Should we turn that loan down because the FICO score has been dinked a bit? What we look for are compensating factors. We train our people in the Thornburg Mortgage philosophy of solid due diligence and risk management, but always apply a common sense approach to any credit decision. TMP: Do brokers have the ability to express what types of products they would like to see launched? Are there any types of "broker focus groups" that you are involved with or where you have an open communication so they can communicate with you? How do you decide on the products that you will offer? JB: Yes. We often conduct focus groups for all of our lending partner channels. The broker channel is, as I mentioned, relatively new, so we have not had a series of focus groups yet. We just introduced two new products in the last couple of months as a result of suggestions from our lending partners—a foreign national program and a fixed-option ARM program. Michael conducts quarterly sales meetings that all of our AEs attend. He also has weekly telephone meetings. Part of what we use these meetings for is to get feedback from our sales people based on what they are hearing from the field, from their customers. We channel that feedback to our product development department. TMP: One thing that's taking place right now is that legislators at the federal and state levels are painting a picture that the problems of today's mortgage industry were created primarily by Mortgage Brokers. Do you have any types of feelings, especially with your political insight, as to how the broker industry can respond to that? JB: Recall the effects of the 1986 tax reform act. Then it was the savings & loan [S&L] presidents who were portrayed as evil incarnate. But, it wasn't the S&L presidents who encouraged the S&Ls to initially start lending outside of their realm of expertise; it was the Federal Government. The feds changed the rules, then they came in and passed the '86 tax reform act, and basically destroyed the S&L industry in this country. That's a simplistic summary, but there are lessons to be learned. Now, we're supposed to believe that the evil incarnate this time around is the broker industry. Let's analyze very quickly how the mortgage lending industry, not the broker channel, but the mortgage lending industry got where it is today. First of all, the feds have put incredible pressure on the GSEs [government-sponsored enterprises] to lend to disadvantaged borrowers. They have been putting all kinds of pressure to get people into mortgages that couldn't afford to buy a home. Second, they've created all kinds of programs for low-income and credit-challenged borrowers to them to get into homes. Then we had Wall Street dumping billions of dollars into the industry saying, We want more sub-prime paper because we can get a better yield spread on it. That exacerbated the situation. Then, you have foreign central banks, hedge funds, insurance companies, pension funds, and the like buying mortgage-backed securities, going after higher yielding, sub-prime paper. Many lenders were seduced into making sub-prime loans because there was a huge appetite for that sort of paper. Thornburg Mortgage didn't play that game. We stuck to a disciplined, conservative approach. Our management team has seen the sub-prime business blow up before. Besides, our niche is the super-prime sector, not the sub-prime sector. There are many lenders in this country that decided that they could do a good business in the sub-prime arena. That does not mean that these lenders committed fraud. What it does mean is that these lenders were perhaps more aggressive than they should have been and have made loans to people who shouldn't have been qualified. Lenders who extended credit to borrowers who they knew could not make their mortgage payments are culpable. But, I also say that there is responsibility on the borrower's part, too. If a borrower knows that they cannot make a payment, if the borrower knows that they are getting into an interest-only teaser rated option ARM where the rate's going to go from one percent the first month up to seven percent or whatever in the near future, they can figure out what their payments are going to be just like you and I can. I think there is a lot of blame to go around here and for the feds or the regulators at any level to be criticizing the broker community is disingenuous at best. I believe that any lender that perpetrates a fraud should absolutely get the book thrown at them. But, again, just because a loan goes delinquent, does not mean, ipso facto, that a fraud was perpetrated. TMP: What are your pledged-asset loans and what scenarios are ideal for them? JB: Our pledged-asset products allow a sophisticated borrower to be able to maintain their investment portfolio. It let's them leave their portfolio in place. Let's use an example: A borrower wants to buy a $1 million home; he needs to come up with a $200,000 downpayment. That means he's got to sell more than $200,000 worth of stock because he's got to pay capital gains on the sale. He can pledge part of that portfolio against the mortgage loan which allows him to remain fully invested, he gets a larger tax deduction for interest expense, and avoids the capital gains tax on a sale of part of his investment portfolio. For an affluent borrower, it's a great tool. TMP: With declining originations, the value of the Mortgage Broker converting from being a loan originator to really being a mortgage planner is becoming increasingly common. Do you think the average Mortgage Broker has the wherewithal to be sophisticated enough to encompass the concepts and work with financial planners to be able to become a mortgage planner? JB: I would urge caution to Mortgage Brokers who want to become a "planner." I think any Mortgage Broker should be sophisticated enough to be able to talk about how a mortgage can be a part of a sophisticated borrower's overall financial plan. What I would urge Mortgage Brokers to do is to spread the message to the financial planning community that financial advisors need to stop focusing on just the asset side of their clients' balance sheets and look at the liability side as well. If they do that, there is a role that the Mortgage Broker can play as an advisor, if you will, or a partner with the financial planner. I believe that a sophisticated broker has a huge amount of potential in soliciting referrals from the financial planning community, as well as from the estate-planning community—the legal community. As an example, lawyers and estate-planning attorneys are recommending to their clients that they form trusts and LLCs and that they hold their assets in those vehicles. The problem is that when the customer tries to refinance or buy a property in that legal entity, they often cannot do so. Only a few lenders, like Thornburg Mortgage, will allow property to vest in a legal entity such as an LLC or trust. I think the financial planning and estate planning communities would welcome that message. I think the financial advisors in this country would welcome a partnership, even if it's just an informal partnership, with a Mortgage Broker. TMP: What I feel you are really suggesting is that the Mortgage Broker should target the financial planner but kind of re-educate the financial planner to understand how that mortgage can be used as an asset and as a wealth building tool. JB: That's right. Mortgage Brokers know mortgages. They should stick to their area of expertise. Financial planners know investments. They should stick to investments. But the two of them can truly create a benefit for their mutual clients. MM: In the past, I've found financial planners, attorneys and insurance agents to be excellent referral sources for mortgage loan originators. I'm in the process of working with our training department to put together a training module for our AEs and regional sales mangers on how to work with brokers, building that relationship and even opening dialogue with financial planners; how to identify the right financial planners, and then help those financial planners target the type of borrowers Thornburg Mortgage is looking for. Not only do we have three potential resources in financial planners, attorneys and insurance agents—but we've also identified community banks which typically want a private mortgage banking-look but aren't as big as your Bank of Americas and Wells Fargos and welcome the opportunity for someone like Thornburg Mortgage to come in and train them. Hopefully, by the fourth quarter of this year, we'll have that training module in place. We'll start training our people by the first part of 2008. TMP: Mike, following up on your end, can you offer any advice to Mortgage Brokers in recruiting the types of candidates that you feel would be the quality type of loan officer that would fit the type of originations for your market? MM: I think from a broker's perspective, you, first and foremost, have to understand the Thornburg Mortgage client and what the borrower looks like. Then, secondly, the broker needs to ask the question, Does the potential L.O. candidate have that book of business? Do they know how to identify the right source—whether it be real estate agents, financial planners, or whatever—to generate their book of business. Have they really targeted and identified the kind of borrower that we're looking for? We're looking for a sophisticated borrower with a superior credit history. It is going to take a lot more granular interviewing than that involved with recruiting your typical loan officer. I would encourage that the broker-look for loan officers who have experience, look at the type of business they're familiar with, where do they generate their lead sources, and what's their closing ratio on their super-jumbo loans. TMP: How important is membership in trade associations such as the National Association of Mortgage Brokers in enhancing the professionalism of the Mortgage Broker? JB: I think it's extremely important, and it goes way beyond just enhancing professionalism. Our goal in belonging to an association and attending its functions is to act as an educator, to educate the other members about how they can help grow their businesses—obviously, through Thornburg Mortgage products. But it's critical, particularly at a time like this, that the companies in the industry support the association when it's under attack. Every one of those brokers out there is a potential lobbyist, if you will, for the association, for the industry. TMP: How would you hope Thornburg Mortgage is perceived as far as the mortgage industry is concerned? What do you want a person's view of the company to be? JB: We would like to be perceived as the standard from an ethics standpoint. We would like to be held up by other lenders as that company that has really set the standard for doing the right thing for our lending partners, as well as for our borrowers. Second, if somebody asks, "Who would you recommend I go to, to get a loan to do a sophisticated deal or a complicated deal or a large deal?" we would like the answer to be Thornburg Mortgage. We want to be recognized as the premier place for a borrower to get that kind of loan. What we would like to be able to do is have our lending partners share in that reputation. In other words, if somebody says, "I need to get a $2 million loan on a condo in New York City," a real estate agent would say, "You need to go see so-and-so broker because they have Thornburg Mortgage products." I think we will have reached mortgage origination heaven when we get to that point.