A new foundation

One of America’s biggest mortgage lenders is not like the others

May 26th 2016|DETROIT

WELLS FARGO, America’s biggest provider of retail mortgages, drums up custom, and cheap funds to lend, through its 6,246 branches. The third- (Bank of America) and fourth-biggest (JPMorgan Chase) providers follow a similar model. But the second-biggest mortgage firm, Quicken Loans, does business completely differently. It does not have any branches, interacting with its customers online and by telephone instead. Nor does it take deposits, relying on wholesale funding to finance its lending. Despite (or perhaps because of) breaking all these conventions, it is the fastest-growing firm in the industry: its new lending has risen from $12 billion in 2008 to $79 billion last year.

America’s 50 states all have slightly different laws regarding mortgages. Local bylaws in many cities and counties also affect property purchases. Then there are overlapping federal rules, especially regarding mortgages to be securitised and sold through Fannie Mae and Freddie Mac, two government-backed entities. So although mortgages may seem much the same to borrowers across the country, the firms that offer them have long assumed that they need a local presence to conform with the tangle of rules. As a result, the mortgage business is absurdly fragmented. Even Wells has only a 7% market share.

In the late 1990s Dan Gilbert, Quicken’s founder, began to question this logic. He was struck by the ease of buying a sofa online; if something so big and cumbersome could be sold without bricks and mortar, then surely an intangible product like a mortgage could, whatever the legal intricacies. He began selling off Quicken’s 28 branches in 1998 and ultimately centralised the firm’s operations in downtown Detroit. From a growing collection of grand old buildings, including a former outpost of the Federal Reserve, Quicken began to market mortgages to customers all over the country. Applications are handled by employees schooled in the legal niceties of the relevant jurisdiction, but based in Detroit.

It helps that Quicken can sell its mortgages through Fannie and Freddie, and so does not need a huge balance-sheet to finance them. But because it relies on relatively expensive wholesale funding, it would struggle to compete with other providers on price. Its interest rates are typically 0.25-0.4 percentage points higher than the cheapest alternatives.

Instead Quicken aims to compete on service. It claims customers can fill out an online application and receive a decision on its latest offering, Rocket Mortgage, within eight minutes. The underlying software conducts a quick electronic sweep of the applicant’s financial records, along with any available data about the property to be purchased. For customers who are confused or whose applications are unusually complicated, help is available by phone or e-mail.

Quicken tries to ensure good customer service by keeping its own employees happy. Desks and chairs are fancy, adjustable, ergonomic affairs; the bathrooms have televisions set to sports channels. Some workers scoot around the bright open-plan offices on hoverboards. New recruits receive an eight-hour induction from Mr Gilbert and others, built around 19 principles (“isms” in Quicken-speak). They are told that “a penny saved is a penny earned” is terrible advice; that they should only say “no” when they have exhausted the possibility of saying “yes”, and so on. Show indifference to a customer and, Mr Gilbert writes, “I will find you… and I will personally root you out.”

It is hard to say precisely how well all this works, since Quicken, as a private firm, releases little financial data. But a good test of its values came last year, when the government sued it, claiming it had fiddled data on mortgages for poorer house-buyers backed by the government, which caused the government losses when the loans went bad. Other financial firms hit with similar complaints have grumbled about a shakedown and settled. Quicken is contesting the lawsuit, saying the government’s case rests on 55 mortgages out of 246,000, and that it has got its facts wrong about 47 of those. As with so many things Quicken does, no other big financial firm would have dared behave in that way.

This article appeared in the Finance & economics section of the print edition under the headline "A new foundation"