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This month, we had a chance to chat with Brett McGovern, founder, president and board member of Bay Equity LLC, and president of Bay Equity Home Loans. Brett has more than 17 years of experience in real estate sales and lending. Prior to founding Bay Equity, he was a senior vice president of Grubb & Ellis Company in San Francisco. He is responsible for key corporate functions, including investor and warehouse line relations, oversight of accounting and secondary functions, marketing and corporate communications.
How did you first get started in the mortgage business?
I started as senior vice president of Grubb & Ellis Company in San Francisco, leasing and selling office buildings in the commercial real estate marketplace. My brothers and a number of my friends were working as sales executives at Washington Mutual (WAMU) and were doing pretty well. In 2004, I decided to join WAMU and originate loans and did well with WAMU.
When things began to deteriorate in the marketplace around March of 2007, I called a mentor of mine, Jim Corbett. Jim founded the non-profit Sacramento Entrepreneurship Academy, a program for students of Sacramento State University and UC Davis. It’s a year-long program every Saturday from 8:00 a.m.-1:00 p.m. where you form a team and develop a business plan over the course of the year. In addition, each Saturday successful businesspeople from the area come and talk to you about accounting and law, and a variety of subjects that can help you craft your business plan. I went through the Academy in 1995 when I was a senior at UC Davis. There, I got the framework on what it takes to start a company. Students who go through the program all go through their own gestation period. It doesn’t mean you are going to start a company when you complete it, but you know what to do when you are ready to take that leap.
In 2007, I saw an opportunity with the landscape of the mortgage industry changing, so I decided to start Bay Equity. I called Jim and pitched him the idea of Bay Equity and he agreed to serve as the firm’s chairman. Jim is a long-time entrepreneur and successful real estate investor, who has served as chairman of Bay Equity since its inception. We developed the business plan for Bay Equity, and my brothers, Managing Directors Jon and Casey McGovern, joined shortly thereafter.
We raised $1,750,000 in startup capital just for balance sheet purposes, and formed Bay Equity in June of 2007. The credit crisis started the next month, causing us to revise our original business plan and delaying our ability to actually get in business. Warehouse lines were in a defensive mode and not providing liquidity to start up ventures. I ended up calling around 100 community banks to try and get a line of credit that we would use like a warehouse line and finally found one, Bridge Bank in San Jose who agreed to give us a line of credit. We showed them how it could function as a warehouse line with the help of some operations expertise that was involved early in the company’s development.
We now had the line of credit from Bridge Bank and got approval from Citi to buy our loans, funding our first loan in May of 2008. Gradually, from May of 2008 onward, we increased our volume and eventually got more investors in the mix—GMAC, Bank of America and Wells Fargo. Wachovia, which later became Wells Fargo, was the first warehouse provider to give us a normal warehouse line for $2.5 million We grew that warehouse line from $10 million to $20 million upward and are currently at $60 million. We have other warehouse lines that filled out our mix as we got a bigger track record.
How has Bay Equity continued its growth?
In April of 2009, we started focusing on growing retail, with 12 retail branch offices located in California and Washington. We also have 28 wholesale account executives in 10 western states, Our wholesale/retail mix is probably 65/35, and since funding our first loan, we’ve done over $3.5 billion in volume and more than 9,500 loans. Our business model is based on a culture of responsible lending, hard work and dedication to providing financing to our customers. In 2010, we made great progress in completing our executive team. Our management team is made up of industry veterans with experience in secondary marketing, finance, operations, compliance, credit and human resources. We are working hard to leave the entrepreneurial phase of our company’s development behind us and to have the ability to scale. As long as we can stay safe and compliant, and make sure that we are doing the right thing by keeping the ship safe and sound, we are going to be set up for success. We’re now selling direct to Fannie Mae, which is exciting especially in light of the recent volatility in the marketplace. Whether it be large loan aggregators leaving the correspondent space, or changes in the way servicing is valued and accounted for, we feel it’s important to be able to sell direct to the agencies as another option for our daily best execution and loan delivery.
Do you think there is a future in private-labeled products?
Yes I do, but I don’t think we’re quite there yet. Private capital will need to come in and fill the void left from the lack of any securitization market outside of the agency products. I think originators like Bay Equity will see opportunities to find niches for new products that make sense for the borrower. Combine this ability to originate with the private capital required to take it to the securitization market, and you’ll see successful new products enter the market. Just when that might happen is still up for speculation. It’s likely that a jumbo product that fills the void left by reduced agency high-balance loan limits, but that still has the underwriting quality of an agency loan will be first to the market.
What is it like working so closely with your two brothers, Jon and Casey McGovern?
It’s great. We’re a pretty tight-knit family. Over time and over the development of Bay Equity, we have identified our key roles and what we are in charge of. I oversee secondary and finance, and serve as the main contact for third parties like investors or warehouse line providers. I also spearhead raising capital and investor relations. We have done a couple of rounds of preferred equity and did a subordinated debt round a few years ago. It bolsters our balance sheet and provides additional capital to grow the company. My brother Jon oversees human resources, operations and the IT department, while my other brother Casey oversees sales in both the wholesale and retail channels. We try and separate our duties and responsibilities as to maximize our time as much as possible.
What led to Bay Equity branching out into retail in 2009, and what factored into the broker-to-banker programs?
The writing was clearly on the wall in 2009, with regulations looming and the wholesale origination channel under increased scrutiny. We felt like it was important for Bay Equity to become more diversified, by not just relying on the wholesale channel, but to also have a strong retail network. The regulatory environment helped push this agenda with changes in both disclosure laws, as well as the way loan officers were to be compensated. Brokers began to take a look in the mirror and assess whether it was more advantageous to be under the mortgage banking umbrella.
There are a number of mortgage brokers who see the value of rolling in under a mortgage banking platform like us. Bay Equity handles many of the administrative tasks that have become burdensome to independent mortgage brokers, such as accounting, human resources, compliance, licensing, and other administrative tasks which take away time from mortgage brokers, and in turn, frees them up to do what they do best … originate loans. Government regulations have added yet another layer of complexity to the difficulty of running a mortgage business in this environment, so our model works very well for mortgage brokers.
We want to support our customer, no matter who they are. We think the wholesale market will stick around. There will be a certain percentage of the originator market who will want to be independent and run their own business like brokers in this environment and we are going to support them as much as we can. But if a certain percentage of that broker community is looking at joining a mortgage bank, we want to have a very competitive and appealing platform for them to entertain. We’ve been pretty successful in recruiting, but have also been very selective.
Could you define which business models are best for the mortgage broker and which are best for the mortgage banking branch?
There is just such a mixed bag out there that I don’t think you can pin it down to saying that a certain model works best. I think it’s more in each individual circumstance and how professionally run the mortgage brokerage operation is. Bay Equity has a diverse group of retail offices that drum up business in all different ways, from a call center model to purchase business-driven realtor relationships, to long time LOs who have their own book of business. We also have a new branch in San Francisco that fits the last category. Manny Kagan's office is the longest-running mortgage brokerage in San Francisco, having opened its doors in 1984. Manny has loan officers who have been with him for years and who have their own book of business. He does a lot of purchase business with Realtor relationships. Manny has found that the banking platform works well especially where his team works with the same internal support staff, including underwriters, funders, etc. You get a lot of close cooperation and chemistry with one group of people, and you get the attention that you need instead of putting 10 percent of your business with a lender which makes you just a number amongst all the other loans.
At the Mortgage Bankers Association (MBA) Annual Conference in October, one of the speakers mentioned that in 2008, it was taking 30 days to close a loan, and in 2010, it was taking an average of 52 days to close a loan. What do you feel has caused that time delay and what is the typical closing time for a Bay Equity loan?
There has been a lot of consolidation in the industry, and the big banks have swallowed up a lot of the market share. The big banks have the dominant market share nowadays, and I think that is why you see this difference due to the sheer volume of business they are doing. When rates went under the four percent mark four months ago, the turn time for a refinance went to 90 days at some big banks. An independent mortgage banker like Bay Equity can better streamline that process. Currently, we can close a loan in 21 days based upon the volume that we are doing and the structure of our operations. Bay Equity can beat the big banks on price, lower the cost to originate and deliver greater service. It’s a real value proposition for us against the banks that have most of the market share.
How has your profit-per-loan changed over the past few years?
There is a great deal more compliance that must be performed these days as opposed to 2008. The things we have to do now to get a loan through the pipeline, known in our company as “manufacturing quality,” has changed dramatically. We now comply with newer requirements like Fannie Mae’s Loan Quality Initiative (LQI) which help tighten the overall quality of the loans as they head to the secondary market, in addition to other compliance controls. The barriers to entry are much greater than they use to be.
Our profit margins fluctuate based on market conditions and how things are with the rates, but it has been tougher to operate. Those who can master these compliance issues will do very well moving forward.
What would you consider your greatest accomplishment in the industry?
We have weathered the storm so far, from starting Bay Equity as the market was deteriorating in 2007, to overcoming the challenges of getting a mortgage bank started with no track record. We have been able to get our company to the point from a balance sheet perspective through retained earnings where we now are considered a quality counterparty and are eligible for key industry programs that will help us get to the next level. We would like to take what we have accomplished and use that to become one of the next successful mid-level lenders in the marketplace. We think we are well on our way.
Do you have any regrets?
We have definitely made mistakes as any entrepreneurial company does when just starting out and trying to make it. We probably would have started building our retail channel right away, but I think that being mostly wholesale for the first year or so helped us overcome some of the growing pains that you experience as you are trying to grow something like this. We didn’t bring on retail branches until we were more mature and had our legs underneath us. I also would have tried harder to diversify our investor mix earlier with the addition of the agency outlets.
Over the next two years, what do you think will be the greatest opportunities in the field of mortgage origination?
I think we will see continued consolidation in the industry. It’s getting tougher to operate as a mortgage business, due in large part to the regulatory environment that has been created. And while it has been tough, it has increased the professionalism of the mortgage loan originator. There aren’t many part-time originators left, as now, loan originators have to be licensed through the Nationwide Mortgage Licensing System (NMLS), obtain education credits, etc. What is left is a population of MLOs who are good at what they do and can increase their market share.
There are a number of different ways to originate loans. We are focused on the purchase market. We want to be known as a dependable and reliable purchase lender that Realtors and LOs can feel safe sending their purchase loans to. That’s a natural hedge against the rates rising. We’d like to not be at the mercy of a volatile interest rate market or rising rates. Hopefully, at some point, the real estate market bottoms out, becomes healthier and we can see the market recover and sales pick up again, and that’s where we want to position. We want to have a strong network of branches that are purchase-driven and are situated in local strong real estate markets and have a reputation as a reliable choice for purchase loans.
Earlier you mentioned Jim Corbett as your mentor. Do you have any other mentors who may have guided your professional career?
At Bay Equity, we have a pretty strong team that collaborates and navigates through a variety of issues on a daily basis. Jim Corbett is definitely a mentor of mine in a bigger sense of providing me with the entrepreneurial spirit to seize the opportunity and start Bay Equity. He showed me that if you do things in a sound, ethical and transparent way, success will follow.
Charles Hine also was an important mentor for me as I grew up in the business world in commercial real estate. Charles was instrumental in teaching me valuable life lessons, including how to treat people, how to handle yourself with honesty and integrity, the value of a strong work ethic, and how to make good decisions in light of the bigger picture.
Do you think there is an opportunity for newcomers who are looking to get into the mortgage business? What advice would you pass on to those new to the industry?
In this environment, it is very difficult just to do what it takes to get the right approvals, with the biggest barriers being net worth and experience. We have been fortunate enough to do well over the last few years, and have retained our earnings and maintain our balance sheet to be a strong counter party in this environment. But to do it all over again and see that kind of success would be difficult. Today, you see some of the older industry players who have been out of the game now getting back in. I think people see our current marketplace as a good time to return, but these are individuals who have enjoyed past success and are taking another run at it and know what they are getting into.
Are there any industry-related issues that keep you up at night? What do you see as the biggest threats to your business as a multi-channel mortgage banker?
The uncertainty of the regulatory environment is a big concern, along with the uncertainty of the Consumer Financial Protection Bureau (CFPB). The CFPB is an unknown for a lot of us who are working hard to maintain a compliant business and simply do business the right way. Will new laws be passed that will further impact the way we do business? At what point will all of this ease up? While the laws passed have weeded out a lot of the part-timers in the industry, uncertainty about the state of the regulatory environment remains.
The landscape of the industry is also changing. Big banks like GMAC and Bank of America are getting out of correspondent lending and pulling reigning in their mortgage divisions. What will the future be like? Will private capital replace the big loan aggregators? Will rates continue to drop? These are just a few of the issues that we track on an ongoing basis.
What do you see in the future for Bay Equity?
I think we have a tremendous opportunity for continued growth. The big banks are a little dysfunctional in some measure with the way they are pulling back from the marketplace. Bay Equity’s geographic footprint is limited to California, but we have measures in place to expand both our wholesale and retail channels initially into the northwestern United States. We are adding new branches and have the right team members in place to lead this expansion. We have opened up a Portland, Ore. office as a third operations center.
I think with the continued migration of mortgage brokers to mortgage bankers, we will keep adding experienced professionals to our team as we expand throughout the West Coast. As long as we continue to manufacture loans properly and continue to grow our balance sheet, the future of Bay Equity is very bright.
The next phase of our business is going to focus on re-engineering Bay Equity … how we do things, continuing to improve our totally paperless operation, making the most of the efficiencies that come with technology and upgrading to better technology platforms.
