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.
