Quicken Loans Inc. Chief Executive Officer Bill Emerson went from a walk-on with Pennsylvania State University’s football team to part of Coach Joe Paterno’s 1982 championship squad, and then a captain two years later.
Emerson last year led Quicken, the mortgage lender owned by billionaire Dan Gilbert that was the 34th-largest in 2006 as the U.S. housing boom ended, to near the very top of an industry that’s reaping the rewards of a refinancing boom engineered by the Federal Reserve and President Barack Obama.
Quicken is taking advantage of the collapse of hundreds of rivals, retreats by some of the largest banks, and hurdles faced by new competitors. The Detroit-based company overtook Citigroup Inc. (C) as the fifth-ranked originator in the third quarter, and then surpassed U.S. Bancorp and Bank of America Corp. After its lending jumped to $70 billion in 2012 from a previous record of $30 billion, it still has room to grow, according to Emerson.
“Our mission is to do as much or more than we did last year,” Emerson, 50, said in an interview at Bloomberg News headquarters in New York. “There’s a massive market out there, and 93 out of 100 people still wake up and go somewhere else.”
The firm’s rapid expansion reflects its opportunities and ambitions, with its staff growing to about 8,900 this month from 5,400 a year ago. About 7,000 are in Detroit, where founder and Chairman Gilbert -- also the majority owner of investment firm Rock Ventures LLC and the Cleveland Cavaliers basketball team -- moved the lender in 2010 and bought other properties in a long- term bet on that city’s revitalization.
The company is among firms reshaping a mortgage industry broken by the housing bust that drove values down by 35 percent across the country before a recovery that began last year. Causalities included IndyMac Bancorp, American Home Mortgage Investment Corp. and New Century Financial Corp.; Bank of America and Citigroup units that made loans through other firms; and almost all lending that doesn’t qualify for government- backed programs.
For surviving lenders, business has been booming, with new loans rising 22 percent in 2012 to $1.8 trillion as the Fed drove 30-year mortgage rates to record lows below 3.4 percent and Obama expanded federal refinancing programs. Quicken joined lenders including U.S. Bancorp, Flagstar Bancorp Inc., Everbank Financial Corp. (EVER) and PennyMac Mortgage Investment Trust (PMT) in growing even faster.
Retreats by large lenders such as Bank of America left a “tremendous amount of market share available,” said John Robbins, the head of Bexil American Mortgage Inc., who founded two mortgage firms sold to banks that are now part of Wells Fargo & Co. and JPMorgan Chase & Co. (JPM) “If you did a good job, it was there, and it’s going to continue to be there for a while.”
Quicken made about $25 billion of mortgages last quarter, exceeding the $22.1 billion of mortgage production reported by U.S. Bancorp. Bank of America, the second-largest U.S. bank by assets, said it funded $22.5 billion in residential mortgages and home-equity loans as it seeks to rebuild in the business, while Citigroup reported $16.8 billion in mortgage originations.
Those 2012 volumes would have earned Quicken more than $1 billion in profit, based on mortgage earnings data reported by Wells Fargo (WFC), the market leader with $524 billion of originations last year. JPMorgan, which last year licensed some Quicken technology, ranked second.
Quicken has been profitable every year, Emerson said, declining to provide figures. It has “no near-term game plan in terms of an exit strategy” such as a sale or initial public offering, he said.
The company’s business model differs from most of its rivals. It eschews branches and relationships with mortgage brokers or correspondent lenders, and grants loans almost solely through its website and call centers. That’s shifted slightly since 2010, when it began to strike deals with community banks to fund loans to their customers on a co-branded basis.
That business and an arrangement to take referrals from Charles Schwab Corp. (SCHW) fueled about 15 percent of its originations last year, according to Emerson. Roughly 85 percent of the total was refinancing, he said.
Quicken’s centralized operations make use of proprietary software designed to make it more customer-friendly and efficient, such as by breaking up work typically done by one processor into 16 different jobs, Emerson said.
That “fantastic technology” has created a “very scalable model,” said James Raezer, head of mortgage finance in the Americas at Royal Bank of Scotland Group Plc’s securities arm, one of its lenders. “They’re a pretty impressive organization.”
The company was founded in 1985 by Gilbert as a traditional, branch-based lender named Rock Financial Corp. Emerson joined in 1993 as a loan officer, after getting an interview from a newspaper ad based partly on his college football success.
He started attending Penn State in 1981 after growing up in Whitney Point, a small town in upstate New York, about 55 miles from Syracuse. His father was a physical education teacher, coaching football, basketball and other high-school sports.
At Penn State, he went out for the football team as an invited walk-on, with no promise of financial aid, then won a scholarship after his sophomore year to help pay for his degree in finance. A 5-foot-11, 195-pound running back, he played mostly on special teams, and was made one of five captains as a senior despite a limited on-field role. He rushed twice for 12 yards and caught one pass, according to sports-reference.com.
Emerson distinguished himself at Quicken by leading an initiative to create what it described as a “mortgage in a box.” The firm mailed documents for customers to fill out and send back -- a precursor to the online model it would begin to focus on after going public in May 1998, when it raised $33 million.
Within two years, with Internet-related stocks booming, the company was bought by Intuit Inc., the maker of the Quicken and TurboTax personal-finance software, for $529.4 million. The marriage was short-lived, amid predictions that interest rates were set to rise and as Intuit sought to focus more on small businesses, rather than consumers.
At Gilbert’s retirement party in 2002, an Intuit executive broached the idea of him buying it back, Emerson said. After Emerson took over as CEO as planned, the lender was sold that August for $20.5 million to a group led by Gilbert, which also got the right to use the Quicken brand. By last year, Gilbert ranked 250th on Forbes magazine’s list of the wealthiest Americans, with a net worth estimated at $1.9 billion.
Emerson, who communicates with Gilbert at least every other day, has seen his own stature in the industry rise, with roles at the Mortgage Bankers Association and Housing Policy Council, an affiliate of the Financial Services Roundtable led by the industry’s top CEOs, as lenders face reforms and prepare for changes such as the future roles of Fannie Mae and Freddie Mac.
Quicken survived the housing collapse better than those government-supported mortgage-bond guarantors, partly because it had gotten out of subprime lending in 1998. Fannie Mae and Freddie Mac received about $140 billion of taxpayer aid while hundreds of lenders failed after making risky mortgages they couldn’t sell, or because of poorly underwritten loans that they were later forced to repurchase.
Having a model that by its nature isn’t “loan officer- centric” probably helped Quicken, Emerson said. For instance, appraisals have always been ordered through a separate firm it owns, rather than by employees with incentives to make sure mortgages close -- a setup later encouraged by regulators in response to inflated valuations.
The firm was based in Livonia, Michigan before Gilbert moved it to Detroit -- where his Rock Ventures last month added five buildings to holdings including the 101-year-old Chrysler House and 13-story Chase Tower.
The relocation coincided with other shifts in Quicken’s business. After starting in 2009 to retain “a small percentage” of the contracts to service, or manage, the mortgages that it makes, Quicken now keeps almost all of them, and may add more through bulk purchases, Emerson said.
The servicing portfolio, whose growth reflects its view that the contracts are cheap after firms including Bank of America sought to shrink their investments, has climbed to about $80 billion. That would have made it the 17th-biggest servicer as of Sept. 30, according to newsletter Inside Mortgage Finance.
Quicken also last year stood out for becoming “very aggressive” in seeking to use the federal Home Affordable Refinance Program to refinance underwater loans serviced by others, said Vipul Jain, an analyst at Morgan Stanley. That’s exemplified by its radio ads, he said. The company tells prospective borrowers that it may be able to refinance their loans no matter how much they owe on their house.
The firm went after HARP loans after Fannie Mae and Freddie Mac made changes to the program that reduced the risk for new lenders that they would need to buy back the mortgages for appraisal errors, Emerson said.
The rapid expansion may be hurting its vaunted reputation for service, after it topped J.D. Power & Associates customer- satisfaction surveys in the past three years.
Online complaints, such as on the Consumer Affairs website, may reflect the growing pains associated with adding new workers, Emerson said, along with the elevated volumes that are bogging down the industry and some homeowners being too optimistic about their properties’ values.
Reputation is especially important to Quicken, Emerson said, because repeat customers and referrals are a key source of business, as it avoids seeking to win volumes with the lowest rates. The company also advertises on television and online, buys leads from aggregators such as LowerMyBills.com and has started sponsoring a Nascar racing team.
Emerson gets daily reports about all complaints seen about the firm in social media or received in e-mails, and he and Gilbert are alerted whenever a potential borrower’s question goes 24 hours without a response, he said. An internal slogan, reminiscent of a sports team, says: “Every client. Every time. No exceptions. No excuses.”
Emerson’s time at Penn State became directly part of his professional life last year when he sent a note to Quicken’s employees in January after the death of Paterno, discussing his thoughts on the coach. Paterno’s reputation had been tarred by the Jerry Sandusky child-molestation scandal. A university- commissioned report in July said Paterno failed to take responsible action to prevent the sexual abuse of children.
“There’s no way it wouldn’t hit you hard,” Emerson said, referring to the death of Paterno, whose funeral he attended. “Anyone who’s played for him, everyone who knows him, knows what he was about.”
Professionally, Emerson’s biggest challenges may be ahead.
Refinancing, which accounted for 71 percent of originations last year, may fall to 58 percent of volumes this year and 34 percent in 2014, as rates increase. That’s going to help bring down total lending by 39 percent to $1.1 trillion, according to a Mortgage Bankers Association forecast. Economists predict that 10-year Treasury yields, which help guide borrowing costs, will rise to 2.27 percent at the end of this year, from 1.86 percent as of 1 p.m. in New York, according to data compiled by Bloomberg.
Even with the reduced volumes, firms like Quicken can expand. New potential competitors are finding it more difficult to get into the business because it’s harder to obtain state licenses or Fannie Mae approvals, according to Robbins, whose Bexil American firm started lending last year through brokers.
Still, Robbins is skeptical about how well an online lender can do once refinancing dries up. Borrowers often choose which firm to use for mortgages for home purchases based on referrals by real-estate agents or builders, driven in many cases by personal relationships with local loan officers, he said.
“It’s the Achilles heel of that particular model,” said Robbins, who’s been involved in the mortgage business for more than 40 years. “I have always found that the face-to-face relationship is far superior.”
Quicken’s refinancing prowess is reflected in its move in 2011 to start marketing around its “Yourgage,” a rare attempt by a lender to differentiate itself with an unconventional product since the housing boom. Essentially a traditional mortgage with a term equal to any number of years that a borrower chooses, the loan accounted for about 5 percent of volume last year, with eight years being the most popular length as homeowners seek to avoid extending their debt as they refinance, Emerson said.
It’s now working on strategies to capture more purchase- mortgage business, he said.
The firm’s increasing market share gives it customers who may return when they buy properties, and an online lender can win over real estate agents by giving them “visibility into what’s going on with their transaction,” Emerson said. “It’s completely doable.”
The company has a shot, according to Mark Fleming, chief economist at real-estate data firm CoreLogic Inc. Differing from rivals he’s visited, Quicken’s offices “buzz” with engaged employees, it runs a “slick marketing engine” and consumers are growing more used to online transactions.
“Things are changing and maybe you don’t need those local relationships anymore,” Fleming said.
To contact the reporters on this story: Jody Shenn in New York at email@example.com;