A California mortgage company's refusal to handle government loan programs led to the defection of many of its branch managers and -- ultimately -- its failure. The company had tried to hang on to the dying jumbo market.
First Security Loan Corp. once had as many as 20 offices.
But the mortgage brokerage had recently dwindled down to two branches as the market shifted to FHA loans, which it did not originate, and shifted away from the jumbo loans that once accounted for a large share of its business.
Now, the San Raphael, Calif.-based company is closing the two remaining offices.
"We've been cutting back the agents and reducing all of our offices the past year," one person, who asked to not be identified because he was not authorized to speak for the company, told MortgageDaily.com. "In about a week the office in San Raphael will be closed down. But loans already in-house will continue to be closed."
That will leave the San Francisco office as the only remaining office -- and it is scheduled to close by the end of April.
First Security Loan was founded in 1983 by Chief Executive Officer Jim Chapman and office manager Mary Alger.
Neither Chapman nor Alger returned phone calls from MortgageDaily.com.
First Security's mortgage banking arm, Residential Mortgage Capital, closed in January 2008 -- leaving First Security Loan solely as a mortgage brokerage firm. The source indicated that the loss of Residential Mortgage was a blow to the company.
"We had had hopes of doing our own loans through them," he continued.
He explained that First Security's overhead was crippling.
"We had an 11,000-square-foot office in San Raphael that had only 12 employees and 10 agents," he said. "You can't support that when you're not doing a lot of loans. If you're losing that much money, you can't be in business long.
"The writing was on the wall that this industry is going through a major change."
He noted that "mortgage brokers are pretty much a dying breed right now" and said the location of the company's offices -- in the high-cost areas of California -- left it hanging when jumbo financing dried up.
That sentiment was echoed by other First Security employees.
"The geographical location of First Security Loan's offices in San Raphael and Marin County is just jumbo territory and those guys never embraced conforming loans or, especially, government loans," a loan agent who left First Security Loan to join an FHA-approved lender told MortgageDaily.com.
"We did all kinds of loans, but California has been a jumbo market," another former First Security employee now doing FHA and conforming loans told MortgageDaily.com. "But few people are buying multi-million dollar homes today. It's a conforming market now."
First Security had originated as much as $5 billion in loans in 2006 -- when it had close to 400 employees, mortgage brokers and mortgage agents, the two estimated.
But the company has dwindled down to around 35 people, according to published reports.
Starting in 2007, many of First Security Loan's branch offices began affiliating with other existing companies or became new companies, several sources told MortgageDaily.com.
The Mill Valley office, for example, became a new separate company, RPM Mortgage, which began with all 40 loan officers that had worked for First Security and who kept all the loan applications they already had in hand, the manager told MortgageDaily.com.
And the Roseville, Pleasanton and Rohnert Park locations became part of another new company, First Security Financial Group. That company was co-founded in late September 2007 by former First Security executives Bill Ormond and Larry Challis and began operations in March 2008.
"One of the original reasons we were spinning off was that we were going after the FHA piece," Ormond told MortgageDaily.com.
The new company started in Roseville and then added what were previously First Security's Pleasanton and Rohnert Park's offices, he explained.
"They were going to dump them," he said. "So we picked them up and extended an umbrella out to those folks."
It was in 2007 that originations at First Security started to fall "because they started to get rid of a lot of their branches," Ormond said.
"They were funding half a billion a month for a while," he continued. "Then the crisis came in the market and it started to fall down real fast. That's when they started to lay people off. They had got themselves in the position where they were just doing jumbo stuff. We're in more of a conforming market."
Ormond, who had been with First Security for 15 years, said they wanted to pursue FHA business -- which now accounts for more than 60 percent of his current company's business.
All of the new entities operating at former First Security offices retained the old phone numbers as well as most of the former staff.