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Former Subprime CEO Heads Growing Firm

Skyline CEO talks about future, Ownit past

Oct. 11, 2010

By staff

A billion-dollar lender based in California has plans to increase its mortgage staff in excess of 80 percent and more than double its home-loan production. The growth is being funded by an $8 million investment. The chief of the company talked with Mortgage Daily about upcoming plans and about his time leading a subprime lender while it became one of the first high-profile casualties of the subprime meltdown.

Skyline Financial Corp. is hiring more employees.

"With increased capital requirements by investors, warehouse lenders and regulators, thousands of independent mortgage brokers and lenders have been put out of business," a news statement Monday said. "With thousands of seasoned mortgage professionals now looking for an entrepreneurial, yet stable work environment, Skyline has an opportunity to expand rapidly."

The chief executive officer of the Calabasas, Calif.-based company is Bill Dallas.

As of today, Dallas said in a telephone interview that headcount at the 25-year-old firm stood at around 220. That includes 135 loan originators operating from 11 branches in California, Oregon and Texas. They also operate in Washington. The company has grown from around 75 people last year.

By next year, Skyline forecasts that it will employ around 400 people.

Behind the recruiting campaign is an $8.2 million investment by a group led by GRP Partners and including Chaparal Investments and Dallas Capital Management Inc. Investors purchased Series B funding.

"With reduced competition and the market's over-reliance on large banks to provide loans, a proven independent player like Skyline has a rare opportunity to attract and acquire both individuals and whole firms of top-producing, independent originators," GRP Partner and Skyline board member Brian McLoughlin said in today's statement.

While the company currently reports around $100 million in monthly originations, Dallas says the integration of two other origination operations is expected to push total originations to between $2.5 billion and $3 billion next year.

Dallas noted that all business is originated through a retail channel. He highlighted that originators are all paid at least minimum wage, around $1,500 a month plus benefits, and the company cannot afford to carry non-producers.

"Most of the people that we have are producing two to four loans a month," he stated.

One of Dallas' prior jobs was CEO of Ownit Mortgage Solutions. The Agoura Hills, Calif.-based subprime lender stopped lending in 2006 and its collapse was followed by a series of similar events that are collectively known as the 'subprime meltdown.'

"What we did at Ownit, and what we did at First Franklin," Dallas explained, "the product that we were known for, we never thought we were subprime; we always thought we were nonconforming because we only did these 100 percent purchases."

But he said they knew at the end of the cycle that they have to tighten lending and look closer at valuations and non-qualified borrowers.

"Three things -- income, credit and collateral -- all three of them were telling you that the borrower could not sustain the payments," he said. "And yet you couldn't get anybody to listen to you."

While lending should have been tightened, market pressures pushed lending into more aggressive territory.

"Every product, every niche, every grid that you had in a price model, people wanted you to go to no-income, 'lower your FICO,'" he said. "It was like, 'no, this will end badly.'"

He said they started getting repurchase requests at that point.

Dallas called this last credit cycle "irrational."

Dallas explained that Skyline's business, which had been nearly two-thirds purchases a couple months ago, jumped to a 70 percent refinance share last month. Nearly a quarter of the company's refinance business involves borrowers paying down their mortgages, while a similar share are shortening their loan terms.

The CEO explained that aside from some jumbo investor loans, nonconforming programs currently on the market at other organizations include hard-money mortgages with 30 percent to 35 percent down.

He said companies like Skyline don't service and use non-bank aggregators, and three of the biggest players buying servicing-released loans are GMAC, PennyMac and PHH.

Once rates rise 100 basis points, a majority of volume will stop, according to the 30-year mortgage veteran. When the refinance cycle ends, the focus moves to purchase and volume falls, "Everybody is going to scramble a bit for volume." The "very, very stringent underwriting" will be curtailed. While factors like residual income are likely to become less important,

He said that most people in the business won't make it past the current refinance cycle.

But a contraction in originations could force more relaxed underwriting standards. Dallas said that when originations fall by half -- underwriting loosens and innovative alternatives like subprime programs arise. He pointed to three previous cycles -- coming out of 1986, 1994 and 2003 -- when volume fell and innovation rose.

Given lower incomes, higher unemployment and injured credit, "in order for us to stimulate the economy a little bit, you're gonna have to ... dig a little bit deeper -- more, more like what FHA does."

But he doesn't see a return to stated-income programs.

Although the execution is still too weak for a private-label issuance now, he said improving spreads might lead to more aggregation by private-label issuers sometime around the middle of 2011.

Dallas doubts that Skyline will assemble a mortgage servicing platform because such a business it too capital-intensive. But he hedged his position by acknowledging that a servicing operation is needed to do business with Fannie Mae and Freddie Mac.

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