One Bank Did Right by Homeowners & Shareholders – A Story You Haven’t Heard Before
We all know what happened as a result of the mortgage market melt down that began during the summer of 2007… weâ€™re still nursing our wounds, millions have lost homes, millions are still at risk of foreclosure.
We all remember TARP and the taxpayer funded bailouts of Wall Streetâ€™s largest investment and commercial banks almost like it happened yesterday.Â And in 2009, what happened to homeowners that applied for assistance under President Obamaâ€™s Home Affordable Modification Program (â€śHAMPâ€ť), is legendary in its infamy, as documented in the $25 billion National Mortgage Settlement and numerous other well publicized lawsuits that have accused investment and mortgage bankers of positively shocking behavior.
But, here’s a story from the meltdown you probably haven’t heard before…
There is one mortgage originator and investor that should have stood apart from the rest… they did it right for their shareholders, bondholders and borrowers… and while others failed, they survived as a result.Â They didnâ€™t take TARP funds or any sort of tax-payer funded bailout… instead they took their losses, restructured the company, and protected their shareholders…Â even taking the unheard of step of going around their contracted servicers, contacting borrowers and offering to modify loans, even after their servicer had denied modifications.
Their story is one everyone should know… it’s a tragic testament to how things could have been handled… and weren’t.
Today, theyâ€™re a fast growing company with a $100 million market cap, listed on the NYSE MKT, still led by the same CEO and president who founded the company in 1995… and to my way of thinking, itâ€™s absolutely incredible that so few will have knownÂ their story… until now.
The Back Story We All Know…
In 2009, homeowners believed that since taxpayers had bailed out the banks, now those banks would be required by the government to help them by modifying their loans so they could avoid foreclosure.Â The president had said that his program would provide such assistance to 3-4 million homeowners, but after the first 18 months of HAMP had passed, the number of permanent modifications was only a relative handful.
That outcome alone would have been bad enough, but the situation was made infinitely worse as mortgage servicers, entirely unprepared to handle the volume of distressed homeowners applying for modifications, struggled with inadequate staffing and resources to implement a program, too quickly conceived, with rules in almost constant flux… and the result was nothing short of chaotic.
Loans werenâ€™t written to be later modified for borrowers unable to repay them, and the industryâ€™s foreclosure machine was not oriented to help borrowers in default avoid foreclosure.Â To the contrary, law firmâ€™s hired to handle foreclosures worked under incentives designed to reward faster and more efficient foreclosures, so homes could be put back on the market as soon after default as possible in order to minimize losses to investors.
It was a system that may have made sense in past years, before the summer of 2007 when investors around the globe became concerned that triple A ratings couldnâ€™t be relied upon to accurately reflect risk, abruptly fled the markets for Residential Mortgage Backed Securities (RMBS) and related Collateralized Debt Obligations (CDOs), throwing the secondary mortgage market into a modern day ice age.Â With the availability of credit for all mortgages having evaporated almost overnight, homes were now being pulled off the market as prices started falling faster than anyone ever imagined was possible.
When the nationâ€™s homeowners awoke one Monday morning in September of 2008, the venerable Lehman Bros. had filed bankruptcy, a fate Merrill Lynch had only avoided by selling itself to Bank of America, their homeâ€™s value had fallen by 30 percent, give or take, and Wall Streetâ€™s investment banks were all potentially racing towards insolvency.
A few days later, the worldâ€™s largest insurance company, AIG, was being bailed out by the federal government after its downgrade from AAA triggered collateral calls tied to its issuance of Credit Default Swaps created a need for tens of billions in cash the company simply didnâ€™t have on hand.
Home values falling so fast had left no one time to get out or refinance, and foreclosures were inevitable.Â Discretionary consumer spending essentially stopped, as company layoffs accelerated at an alarming pace, putting an even greater number of homeowners into the foreclosure pipeline, and all of a sudden no one was sure that the worldâ€™s largest economy would be able to avoid another Great Depression.
By 2009, however, the actions taken by the federal government in conjunction with the Federal Reserve, had clearly signaled that we would not allow our financial system to implode, investors breathed a collective sigh of relief, but nothing changed for middle and working class homeowners who were losing jobs and homes in numbers not seen in generations.
President Obama, feeling the enormous pressure to do something to help stop foreclosures, had his plan ready within the first month of his presidency… he called it, Making Home Affordable, and he said it would save millions of homes through modification and refinancing… homeowners needed to simply call their banks directly or for assistance, a HUD counselor… and they would be able to save their homes.
In his speech that introduced the federal program he made clear that it was in everyoneâ€™s interest that foreclosures be stopped whenever possible and the federal government would now be spending $75 billion to ensure thatâ€™s precisely what would happen going forward.
When two stars collide, it’s called a supernova…
This new goal of modifying loans in order to avoid foreclosures whenever possible, however, collided into the industryâ€™s established practices like two neutron stars and the the victims of the crash were homeowners in the millions.
It reached a point where nothing made sense to those closely following the crisis unfold.Â Banks seemed to be incapable of doing almost anything right.Â They were often unable to produce proof of the loanâ€™s ownership… there were even cases of foreclosing on the wrong homes or attempting to foreclose on mortgages long since paid in full.Â And it seemed unquestionable that foreclosures were routinely taking place even when the financial outcome would have been better for the loanâ€™s owner had the loan been modified.
By 2010, the cries of homeowners were being heard by elected representatives in state and federal governments, and as the mainstream media became aware of what was happening, the cumulative effect of the headlines started having an increasingly negative impact on the publicâ€™s opinion of the nationâ€™s largest banks.
The Impac Way Forward…
Actually, although few knew it… not all of the nationâ€™s mortgage bankers were following the same path.
Impac Mortgage Holdings, Inc., led by founder and CEO, Joe Tomkinson, along with co-founder and president William â€śBillâ€ť Ashmore, was dealing with the catastrophic situation in an unheard of way… by downsizing, taking losses, reinventing themselves… and looking to protect their shareholders by making sure their pools of loans stayed performing, which meant hiring and training new employees to modify loans in order to minimize foreclosures.
(Yes, you read that right… they contacted borrowers as the investor, and modified loans.)
Joe Tomkinson, CEO
William “Bill” Ashmore, President
The logic and good sense of Tomkinsonâ€™s plan is enough to renew oneâ€™s faith in the potential for financial executives to do things that are right and smart, instead of embracing non-disclosure until exhibiting strategy driven by greed.Â The contrast between what we all saw happening on Wall Street and what Tomkinson and Ashmore were busy doing is so stark as to make one think the two might exist in different countries, if not on different continents.
To begin with, Tomkinson and Ashmore started to become very concerned about the housing market in 2006, but even more amazing is that they did something based on their concerns… they slashed loan originations by half to $12 billion, and cut their portfolio by 25 percent to $21 billion.Â Had they not taken these steps when they did… had greed or willful blindness driven them to remain in the game so as to squeeze every dime from the marketplace until the last minutes before the meltdown… itâ€™s highly likely that would not have made it through the storm, as so many others did not.
Itâ€™s remarkable that Impacâ€™s senior management team had the intestinal fortitude, if you will, to pull back in 2006 the way they did… to prepare for the events that followed before anyone could be sure what was ahead… when the crisis would begin… how long it would last… or how severe it would be.Â Itâ€™s one thing to be able to say you saw the bubble… I mean, I saw the bubble myself, but I certainly didnâ€™t see it clearly enough to sell my home while it appraised for a million dollars.
As the private securitization market vanished along with the credibility of the ratings agencies, Standard & Poors, Moodyâ€™s and Fitch, Impac closed down its loan origination division, but management saw opportunity when others remained blinded by despair and the company transformed itself into a default servicing firm, and entered into a partnership with a start-up company that would become Auction.com.
In 2007-08, the partnership with Auction.com generated $45 million for Impac and today itâ€™s the largest REO auction company in the world.Â Impac also acquired Advantage Title, a title and escrow company, and grew the business to be one of the largest title firms in California before selling it for a profit in 2010.
They had made it through the hardest of times, and in late 2010, they were ready to create a new residential mortgage banking operation. Because of their successful interim investments in Auction.com and Advantage Title, they were able to launch the new business without the need to raise new capital.
Today, mortgage banking is once again Impacâ€™s core business.Â Itâ€™s approved by Fannie Mae, Freddie Mac and Ginnie Mae and has originated roughly $3 billion in conforming loans to-date.Â Impac completed licensing requirements in 36 states and has 26 retail offices and three channels through which it originates loans… retail, wholesale and correspondent.
Impac now manages a newly originated portfolio of around $2 billion in conforming loans, but the company has also expanded to offer renovation financing, known as 203(k) loans, and recently started offering reverse mortgages and even jumbo loans.
Impac is a company once again on its way up and itâ€™s not hard to see why… they did it right by putting the interests of its shareholders above all others, which drove them to do what others seemed to find impossible… making their loan modification efforts both effective and efficient.
And Impac never asked for… or accepted a nickel of TARP funds or any other tax-payer money.Â They recognized that what was right for investors and shareholders was also right for the borrowers… and I think, considering what has transpired during this crisis over the last few years, that is something that deserves to be applauded and respected… at the very least.Â Were it up to me, I’d make sure they were honored with some sort of national award… a statue on Wall Street even seems appropriate.
My Next Mortgage WILL BE an Impac Mortgage… No question about that.
Iâ€™m quite sure what theyâ€™ve done will also be rewarded, because I know where Iâ€™m going for my next mortgage… directly to Impac, and there are no ifs, ands or buts about it.Â And Iâ€™m guessing that many will feel the same way once they’ve heard the story of Impac Mortgage, as well.Â I can’t imagine anyone wanting to get their mortgage anywhere else?
Investors have already responded.Â The company, although de-listed at one time and relegated to the pink sheets, is back on the big board of the NYSE MKT.Â Its share price has risen by 750 percent since last year, reaching a 52-week high of $18, and recently trading in the $11 – $14 range.
Iâ€™ve known Impacâ€™s General Counsel, Ron Morrison for the last several years, ever since I first heard about the companyâ€™s efforts to circumvent their servicers and modify loans.Â (I wrote about it at the time here: Investors Tired of Servicers Not Modifying, Take Action.)
Ron Morrison, EVP and General Counsel
Ronâ€™s always been willing to help me better understand various topics related to how the mortgage banking industry operates.Â And Iâ€™ve gotten to know other Impac executives as Iâ€™ve learned a lot more about the companyâ€™s history and plans for the future.Â Today, having come through the hard times, Impacâ€™s 520 employees are very much a united force and thatâ€™s an advantage few companies can ever claim.
Recently I met with Impacâ€™s CEO, Joe Tomkinson.Â I expected that meeting to last an hour or so, but three hours later I felt like Iâ€™d spent the time talking with an good friend.Â Like me, he served in the U.S. military, and I canâ€™t recall meeting with anyone that I agreed with as much about everything.Â And for those who think that the mortgage bankers didnâ€™t lose money as a result of the meltdown that began in 2007, Joeâ€™s very candid about it… Impac lost half a billion dollars… thatâ€™s $500,000,000… mostly as the result of its holdings of lower tranches of mortgage backed securities.
So, that means he protected other investors from losses while he watched his company lose hundreds of millions of dollars.Â Thatâ€™s not something just anyone would do without wanting some recognition at the very least, but Joe isnâ€™t one that cares for the limelight.Â On one call with shareholders during the worst days of the crisis, he remembers telling his audience that they should fire him as CEO.Â Of course, no one wanted anything like that to happen… they knew what he and Bill had done.
In 2007, Joe even tried to offer solutions to those in Washington D.C.Â He wrote a white paper and sent it to Rep. Frank, among others.Â But no one listened… even his own elected representatives ignored him.
Heâ€™s one of the very rare individuals that just gets better and better the more I learn about him and there was a time not so long ago that I never would have imagined Iâ€™d ever say that about a mortgage banker.
I guess the moral of the story is… never stop learning and never say never.
DON’T MISS NEXT WEEK’S MANDELMAN MATTERS PODCAST …
A Conversation with Impac’s CEO Joe Tomkinson
The Mortgage Banker Who Did Right by Shareholders & Borrowers
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