Competing in the current marketplace - interview with Joseph Reppert

Competing in the Current Marketplace

FHLBB Journal: We are all aware of the tremendous change which has occurred within the savings and loan business in the last few years. AmeriFirst has been particularly successful in dealing with these changes. Could you share with us your approach on the lending side?

REPPERT: Certainly, I think the basic operation of the savings and loan business in the last three years-- the mortgage business is what I'm particularly addressing--has changed completely, the types of mortgages we make and, perhaps equally important, the way we make them.

Unfortunately, a lot of people are still doing business as they used to, with only modifications. Considering today's situation, I don't believe that is a viable way to proceed.

What AmeriFirst has done is just one example of what can be done. It's not the way to go for everyone, but it's an approach that has worked for us.

Three years ago, we separated the deposit side of the business from the lending side of the business. We separated them to the extent that we formed a service corporation or a wholly owned subsidiary and made it AmeriFirst Mortgage Corporation. AmeriFirst Federal, as the parent of that corporation, continued on with its full service facility branching, where they can take a residential mortgage application, but that is not something they emphasize. They emphasize the depository and consumer lending side of the business.

The reasons for these changes are obvious: our business, with deregulation, has increased in complexity on both the depository side and the residential lending side. They have both become very specialized types of businesses.

We also separated them physically. AmeriFirst today has 60-odd depository branches in Florida, which are all full service branches. In addition to that, they are in different locations. In three states, we have 25 mortgage corporation offices.

The mortgage corporation offices are exclusively dedicated to residential mortgage lending. That is their only function. They're fully staffed with processors, appraisers, underwriters, and attorneys. The mortgage corporation controls the production and processing side and the Federal, as the parent, controls appraisals and underwriting. We find that provides a system of checks and balances and it has proven to be a very sound system.

FHLBB Journal: Why did you choose this approach?

REPPERT: There are a couple of reasons why the mortgage corporation avenue was pursued. Basically, the two primary reasons were operational flexibility and personnel motivation. On the flexibility side, we operate, in Florida for example, under the regulation of the state of Florida as a Florida mortgage broker. Therefore, we can open up or shut down--if that were to be the case--very quickly. All we need are the municipal and county occupational licenses and, in some cases, a mortgage broker's license in order to go into business. That is much less restrictive than it would be if we were opening up limited facility federal branches.

The second factor is that the nature of the mortgage business has changed to the point where we are not only competing against over savings and loans but, also, mortgage bankers and other mortgage originators. Mortgage bankers and others over the last three years have significantly increased their market share of the residential mortgage business. The mortgage bankers' approach has been one that has been most noted in that they tend to provide a higher level of service in that they will go to the various builders, realtors, or customers' homes at an hour that is convenient to the customer. They work on weekends. They work evenings. They carry calling devices--beepers--and so on. And they're highly service intense. But they have lacked the full line of products that the savings and loans have been able to offer. That is, they were only able to offer, in the main, conforming Freddie Mac, Fannie Mae, and government types of loans.

So, the product lines of the savings and loans have historically been greater and the service of the mortgage bankers has been historically perceived, at least, to be better. So we knew we had to compete in both areas--product lines and service.

Mortgage bankers are, normally, paid on a commission basis. We changed the compensation structure for AmeriFirst Mortgage Corporation for everyone--and I mean everyone--so they are paid on some sort of incentive basis. That isn't their total compensation, but it is a large share of it.

FHLBB Journal: As you said, there is a departure from the traditional way savings and loans have done business. What are the disadvantages, if any?

REPORT: One of the fears or concerns that the savings and loan business had about this approach is the maintenance of high quality and control standards. The question has been what will a person be motivated to do when he's working on a commission basis versus a salary basis. I think there has been concern over the completeness of files, the accuracy of the files, and so on. Our experience has proven to us that any concern or fear in this area is unfounded.

The trick is still the same--hire good people. Incentive compensation does not turn good people bad, it simply motivates them to go the extra mile.

We also believed you had to separate the organizations --the functions, hours and approaches are different --so, as I said, we physically, as well as organizationally, separated them.

FHLBB Journal: What has been your success to date?

REPPERT: AmeriFirst this year will close $850 million in new originated mortgages. Of the $850 million, 90 percent of that--over $800 million--was an adjustable type of mortgage, primarily a one-year adjustable mortgage. And I want to emphasize those are legitimate saleable mortgages--no deep discounted first-year rates, no funny indices, no buyer shock in the first or second adjustments, and no yield or interest rate caps. They were all straightforward adjustable mortgages with adequate protections for the borrower and market rates for the lender.

FHLBB Journal: That's an impressive figure. How did you accomplish it?

REPPERT: The key to originating $850 million worth of product and having 90 percent of that in the adjustable category is a personal sales effort on the street. Let me go through our marketing approach for just a second. The marketing approach for depository customers can be done successfully, in general circulation media--that is, radio, TV, newspapers, billboards, and so on--which creates traffic in our offices.

The mortgage business cannot be handled in the same fashion. That's because most people are potential deposit customers. They have checking needs and other sorts of savings needs. But most people are not potential mortgage customers. Therefore, if you market it from a mass media approach and purchase space or time in newspapers, radio or television, your cost per 1,000 has to be very ineffective because, of those 1,000, maybe a couple are looking for your mortgage products at that time.

So, we absolutely do no media advertising with the rare exception of a few newspaper ads on second mortgages. No first mortgages have ever been advertised in general circulation media. What we do is market to relators, builders, and other people in the real estate business. We market to them on a one-on-one basis; that is, our people go to them and make presentations of new products or presentations in the education field, which is probably the key to the whole thing. Producing $850 million doesn't require education until you try to produce 90 percent of those in adjustable mortgages.

And, by the way, the other ten percent that we originated were either sold to Freddie Mac, Fannie Mae, or passed through on an FHA-VA basis. And so we retain no fixed-rate mortgages for our portfolio-- only adjustables.

Education is the key. We do whatever it takes to educate the realtors and the builders because they are, in fact, your real customers. The ultimate customer-- that is, the borrower--is usually being persuaded, if that is the proper word, one way or the other as to what type of mortgage he should be looking for by the person selling the product. That's the real estate sales person.

So you have to educate them. Basically, the question they want answered is: What is the most effective vehicle for my customers? What is best for them? But, also, what is best for the purposes of making a sale as far as mortgages are concerned?

And we have been successful in persuading them-- and there has been no little resistance to this, as everybody in the business knows--but adjustable mortgages will make as many, if not more, sales than the higher rate, long-term, fixed-rate, nonassumable mortgages that we have today.

FHLBB Journal: Exactly what tools do you use in this marketing effort?

REPPERT: Whatever is necessary. As a matter of fact, we've done TV shows and videotape presentations --that we put on for them.

We are actively involved in all levels of realtor and home builder associations. Our people are active in the leadership of those organizations. We are always available to them to speak, not only to them, but to customers. And we work as a team with the real estate person in order to make the sale.

We also provide hand-outs and working tools that tell the story of adjustable mortgages, showing their advantages and offer comparisons to fixed-rate programs.

Basically, the resistance has been one of lack of education, and that resistance can be overcome with education.

FHLBB Journal: Why does AmeriFirst put so much emphasis on adjustable mortgages?

REPPERT: The problem is your source of funds. The depositors will not lock their money up for long periods of time. Therefore, if you're using deposit dollars to make mortgages, the only thing that makes any sense is to make adjustable mortgages that balance out to the term of the deposit dollars as closely as possible.

Now, that's not absolutely possible. But if they adjust on an annual basis, it should start to get pretty close to that balance.

The primary reason for not making fixed-rate mortgages today is the unstable economic environment. The national debt situation is reason enough. We are going faster and faster toward a $2 trillion debt--right now, we're about $1.5 trillion which, in itself, is very disruptive to the capital markets.

As a matter of fact, we now have a weekly economic cycle in the capital markets. The money supply numbers are announced by the Federal Reserve on Friday. On Thursday, anticipation begins in the marketplace and the market starts to react to Friday's unknown. Then, on Monday, you have a brand new market, and that runs until about Wednesday. So, you have a weekly economic cycle and, with a weekly economic cycle, you can't make 30-year, fixed-rate mortgages and make them work for you.

And, while no one knows what is going to happen to interest rates, I think everyone knows that it's a real bad bet to lock in for 30 years. Obviously, the savers aren't going to lock in for anywhere near that long. And, therefore, the lenders cannot either.

FHLBB Journal: But there are other sources of funds beyond depositors' dollars. What about them?

REPPERT: If you look at the secondary market, which is yet another reason for the mortgage banking approach, there probably is a source of funds for long-term, fixed-rate mortgages. That's because they're able to convert those long-term mortgages into more liquid instruments, like Ginnie Maes. Today, they're talking mortgage-backed securities, mortgage-backed bonds, the TIMs legislation, and those sorts of things. In dealing in the secondary market, you probably will find your only source of funds for long-term mortgages.

If funds are to be available for long-term, fixed-rate mortgages, the marketplace should decide it. There probably is a source of long-term, fixed-rate money because, with a liquid instrument, it can be traded and, if people want to take those sorts of risks, that is absolutely fine. That's the way the system should work.

But all loans which are made for portfolio by a savings and loan using short-term deposit dollars must, by any stretch of the imagination, conform on the other side of the ledger sheet. That is, they must be adjustable mortgages.

FHLBB Journal: How would you characterize today's business approach from that of the past?

REPPERT: You cannot be a passive marketeer. You cannot just offer a product and expect it to be taken, particularly a product that has the marketing challenge that an adjustable mortgage does.

And so you have to market that in a much more aggressive fashion. Instead of being in a situation where the public comes to you seeking your product, you must go to the public and, not unlike business, in the main, in this country, you must be able to successfully sell your product.

Many others have successfully sold adjustable mortgages. AmeriFirst has been particularly successful in the Florida markets in penetrating a large market share because we have our people trained not only as financial officers, but as salespeople.

Being a salesperson and working for a financial institution is perhaps not a unique concept, but it is not a broadly practiced way of doing business, either. And so you have to re-orient yourself to going out into the marketplace. And in this case, I'm talking about relators, builders, and the people who control the movement of many other people such as personnel departments of corporations or whatever. There are primary and secondary levels where you need to make your marketing effort.

But you need to go into those marketplaces; you need to make an effective presentation; you need to know your product well. You need to be willing to go that extra mile, working with those people in the evenings, on weekends. Real estate transactions are not consummated just between 8:00 a.m. to 5:00 p.m., Monday through Friday. There are probably more real estate contracts and sales made on the weekends than any other time. Much of the negotiation goes on in the evening where real estate contracts are being run back and forth and those sorts of things in the resale market.

You have to be available during those time frames. That's when the realtors are working and that's when people in the mortgage business need to be working. So, it takes a re-orientation of your thinking as to what you have to do to get the business.

FHLBB Journal: In addition to local competition, aren't we seeing more aggressive expansion by many large mortgage lenders going into new markets?

REPPERT: The business is constantly becoming much more competitive. In Florida, we now enjoy the company of many of the large successful California operations. And they are very good marketeers, and this is healthy. Anything that brings good solid competition into the marketplace is a healthy thing.

There's really no place in the United States where there is any meaningful level of real estate activity going on that won't also be soon enjoying the company of out-of-state mortgage lenders who have been in the mortgage banking business for a long period of time.

And so, no matter where you're operating, if there's any level of real estate activity, you'll probably receive some friendly competition from outside your market area because that is now the way the business is going. In addition to that, you will surely have mortgage brokers and mortgage bankers in your area who will be accessing the secondary market and, if you do not know how to access the secondary markets, they will have a substantial advantage that you do not enjoy if you are only working with depository dollars.

So, for that reason, it makes a lot of sense to become a mortgage banker. What it seems to come down to is there's not a lot of reason not to do that other than it is departure from the way that the savings and loans have approached the business for the past 40-odd years.

FHLBB Journal: So, you're recommending this particular approach to the residential mortgage business?

REPPERT: Whether you form a service corporation and call it a mortgage company, that basically is a policy question. What seems to be needed, though, and what seems to be what is working is that you have to have people who take your products and services to the real estate community at the time the real estate community needs it in a competitive fashion.

It seems that the standard in that industry is a commission compensation standard, not a salary compensation standard. You also need to have access to the secondary markets.

If you have not been trading in secondary markets--and many savings and loans have chosen not to, up to this point--there will be products on the street which you do not have and you will not be competitive if you do not have them.

AmeriFirst has done those things and continues to be successful at doing them. Whether you follow any exact pattern of doing that is not important.

If the question is with any of the people in the industry as to whether we can maintain the status quo, then they are just simply asking themselves the wrong question. The question they must ask themselves is: how do we change in order to put us in a competitive posture for the future?

The mortgage banking approach that I have discussed is just one alternative. There are many alternatives and the people of this industry know what those alternatives are for them. And, certainly, one way of doing business is not the right way for a $10 million shop in Cleveland as it is for a $10 billion shop in California. Those two really have not much to do with each other. Perhaps ten years ago they did business the same way. In the 1980s, they will be very different types of institutions.

FHLBB Journal: But, unlike Florida, we hear that many areas of the country just won't accept the adjustable-rate mortgages. How do you respond to that?

REPPERT: I hear many of my friends say that there are some markets where you cannot make adjustable-rate mortgages. I think, on the face of it, that argument makes little sense.

I think what the reality is, is that in certain markets you have people who have successfully marketed adjustable mortgages. And in markets where it is perceived they will not accept anything but a fixed-rate mortgage, you've simply had an inadequate marketing job done for adjustable mortgages.

Selling adjustable mortgages might be akin to automobile sales several years ago--selling smaller cars with smaller engines that were supposed to be more fuel-efficient but not quite as comfortable. It took a sales job. The Europeans and the Japanese did it better than the Americans for a long, long time. Now, the Americans are being successful at it, also.

But there was resistance to it. If you are a passive marketeer and you meet resistance, you will go back to the path of least resistance and offer products that you can passively market. And adjustable mortgages cannot be passively sold; they must be actively sold. So, my belief is that there are not pockets of the country which will not accept adjustable mortgages. I think there are pockets of the country that have successfully marketed adjustable mortgages and there are places in the country where adjustable mortgages have not been successfully marketed.

So, it has more to do with the marketing than it has to do with customer resistance. And, when you address consumer resistance, I believe it is also true that the consumer who is resisting you is the person controlling the sale--and that is the real estate agent. They are the ones who require the education and who need to be worked with as a team in order to make adjustable mortgages.

The actual borrower's conditioning--at least his preconditioning --is basically done by the person who is perceived to be the expert in real estate. In our business, that is the realtor. He is the expert in the real estate business, not only on where to buy the home, what type of home to buy but, also, how to finance it.

So, they are the ones who need to be sold. If there are pockets in this country where adjustable mortgages are being used, the focal point should be education of the realtors and, if they are comfortable with and believe that they can sell real estate using adjustable mortgages, then you'll see the acceptance of adjustable mortgages. And the most recent data confirms that. Adjustable rate mortgages are being accepted by the consumer. The sales of adjustable rate mortgages are up.

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