How Dan Gilbert has made Quicken Loans thrive in mortgage industry

JC Reindl | Detroit Free Press

Quicken Loans recently overtook embattled Wells Fargo to become the leading direct-to-consumer mortgage lender in the nation.

It is the first time a Detroit-based firm has ever held that title.

Yet being No. 1 in mortgages is a lot different than being tops in other industries, such as automotive. In the highly fragmented mortgage sector, where prospective borrowers can visit some 30,000 bank branches and credit unions across the country for a home loan, Quicken commands a market share of just 5.4 percent.

"Every time we start to get a big head, I remind our people, 'You know that 19 out of 20 people who wake up this morning and get a home loan aren't coming here?' " Dan Gilbert, 56, Quicken's founder and chairman, said in a one-on-one interview in the firm's bright downtown headquarters with windows facing the Renaissance Center and the Detroit River. "We've got a long ways to go."

Gilbert said he thinks Quicken can grow to 10 percent of the market — perhaps even 20 percent or more. The key, he said, is to keep improving Quicken's edge in technology and customer service.

"That’ll take time,” Gilbert said from his 10th floor office in One Campus Martius, previously known as the Compuware building, in Detroit. “But we have the platform and infrastructure in place to do that. We really think we do.”

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Such a feat is rare and hard to achieve. Few lenders ever capture more than 10 percent of the retail mortgage market, a category that excludes loans made through brokers, according to Guy Cecala, CEO and publisher of Inside Mortgage Finance, which produces closely followed lender rankings.

Wells Fargo, in fact, still holds the top ranking for mortgage originations in a broader category that includes loans from brokers and those bought from other lenders.

“It is a lot more of a challenge if you are an online or direct-to-consumer lender like Quicken," Cecala said. “They are going to need to keep up the advertising, they are going to need to be a lender of choice.”

Major employers are important in any city. However, Quicken's success has had an outsize impact on Detroit, which is recovering from decades of disinvestment and a 2013-14 municipal bankruptcy.

If Gilbert's mortgage machine ever sputters out, so could the city's rebound.

Quicken says it employs nearly 13,000 people in Detroit, making it one of the city's largest employers. The mortgage firm accounts for close to three-quarters of the total head count in Detroit for all businesses within Gilbert's family of companies.

Those businesses number more than 100 and range from real estate firm Bedrock to StockX, an online stock market for sneakers, sports apparel and other goods. Gilbert's real estate holdings include more than 100 buildings and new development projects in and around downtown.

Quicken, though, "is still the absolute flagship, most important business — most people, most revenue, most profit," Gilbert said.

Don't say 'nonbank'

Many in the financial industry now classify Quicken as a so-called "nonbank." That distinguishes the firm from traditional banks that take deposits, offer checking accounts and have ATM machines.

Gilbert absolutely hates the term.

He feels that "nonbank" gives the wrong impression of Quicken's business model — and the quality of the $20.4 billion in residential mortgages it originated in the first quarter — as being riskier. Mostly, he thinks it strange to define Quicken by something it is not.

"You know, I'm a non-zebra talking right now — it's just the weirdest thing," Gilbert said. "In what other category in the world is someone a non-something? It's an irrelevant term for both bank and nonbank as it refers to mortgages."

Quicken is the first nonbank to become the top retail mortgage lender since the 2008 financial crisis.

Gilbert says Quicken has achieved its success through an obsessive focus on customer service, a company culture centered on constant improvement, and the innovative online selling and processing of "very vanilla" mortgages — none of the free-wheeling loan products that led to last decade's market meltdown.

About 95 percent of all Quicken's mortgages have explicit government backing through Fannie Mae, Freddie Mac, Ginnie Mae or the Federal Housing Administration, which generally insure loans against homeowner defaults.

Most of Quicken's other loans are so-called jumbo mortgages, Gilbert said, which are those above $453,100 in value (or $679,650 in higher-cost regions) and therefore aren't eligible for government backing.

Defending the title

How long Quicken can stay No. 1 could depend on its adjustment to the mortgage industry's shift away from mortgage refinancings. The number of refinancings has been plummeting nationwide as interest rates inch up.

The shift also has resulted in lower mortgage origination volume across the industry.

The Mortgage Bankers Association forecast that refinancings will fall another 30 percent this year, following a 33 percent year-over-year drop in 2017. The rate on a 30-year, fixed-rate mortgage was 4.56 percent Thursday, up from 3.94 percent a year ago, according to Freddie Mac.

Quicken's strong first-quarter results, achieved in a purchase-oriented mortgage market, suggest that it is making the transition.

"They managed to thrive in a home purchase market, which would suggest (the refinancings fade) is not an issue," Cecala said. "But it will be easier to tell after 2018 is in the record book."

Quicken also has gotten more involved in the business of servicing mortgages, which generates revenue for the firm. Servicing involves collecting payments from homeowners on behalf of the owners or investors in the mortgage.

"They are the seventh largest servicer in the country now and that is phenomenal given that they really weren't servicing loans six years ago," Cecala said.

Gilbert said Quicken has no plans to loosen its lending standards to compensate for lost refinancing business.

"We won't," he said. "Our reputation is not worth any short-term money that you might make from that."

No subprime

Gilbert has long insisted that Quicken did not partake in the subprime mortgage boom that culminated in last decade's market crash. He points to the company's survival through that era when numerous lenders, such as No. 1-ranked Countrywide Financial, disappeared.

"That's why we're alive," he said.

He recalled the significant industry pressure at the time to extend loans to unqualified borrowers.

"I remember our guys bringing us stuff, our guys being our bankers, saying, ‘Hey look, Countrywide is offering 100% loan-to-value loans for 580 (credit) score borrowers with no income verification. I said, ‘We’re not doing these loans,’ " Gilbert said.

“You have to look at it through the eyes of ‘would you loan your money.’ That’s how I ask people to look at it," he added. "Because even if you could make some money in the short term and sell (the mortgage) off, we still have reps and warranties that we make, by the way, to whoever we sell to. And secondly, it’s not the right thing for the customer.”

More recently, Quicken has been battling the U.S. Department of Justice in federal court in a False Claims Act case alleging that, from 2007 through 2011, the firm fraudulently approved borrowers for Federal Housing Administration-backed mortgages.

Gilbert has strongly denied the allegations and, unlike other lenders, has refused to settle the case with a big payout to the government. A trial on the merits of the government's claims isn't expected to start until mid-2019 at the earliest.

Quicken continues to participate in the FHA mortgage program. Other lenders have scaled back or stopped doing FHA loans in recent years.

"The problem in this country is, if you're going to treat the bad guys the same as the good guys, you're not going to have a lot of good guys left," Gilbert said earlier this year.

Rock to Rocket

Gilbert started Quicken Loans, then known as Rock Mortgage, in 1985 with his brother and a friend. Back then, business involved "bringing doughnuts into real estate offices and hoping they give you a referral," he said.

Quicken became one of the first online mortgage lenders in the late 1990s and started shuttering its brick-and-mortar branches.

More recently, through its new Rocket Mortgage mobile and online brand, the firm has shortened the time to closing a mortgage to as few as 16 days for a purchase and eight days for refinancing.

Quicken has won eight consecutive annual J.D. Power awards for client service in mortgage origination and four for mortgage servicing.

Out of suburbia

The start of Detroit's rebound can be traced to Gilbert's decision a decade ago to move Quicken's headquarters from the suburbs and into downtown, bringing thousands of young employees.

Gilbert said he doesn't consider the Detroit move as any sort of charitable act. Had Quicken stuck to the suburbs, today its workforce might be inconveniently spread across multiple buildings, separated 5 or 6 miles apart.

"There is no way we would be the company we are today spread out in the suburbs," he said. "It's been very profitable for us to be a business in the city."

How it works

Unlike traditional banks, Quicken can't rely on a base of customer deposits to make mortgages. Instead, it can either borrow the money for the loans from banks, tap lines of credit or use its own cash, Gilbert said.

"We carry quite a bit on our balance sheet," he said.

Quicken runs the majority of the mortgages through the underwriting systems for the government-backed entities such as Fannie Mae. It then pools the mortgages and bundles them into securities, which Quicken goes on to sell into the secondary market.

It is common for all mortgage lenders — banks and nonbanks — to process and sell their mortgages that way.

Some market observers have raised concerns about the possible risks and dangers of nonbank mortgage lenders, contending that such firms are vulnerable to sudden dry-ups in their short-term credit lines.

Gilbert insists that Quicken is well-capitalized and less risky than many banks.

"We have more assets than 94 percent of FDIC-insured banks," he said.

Moody's Investors Services upgraded Quicken's bond rating by a step in December, saying that "while profitability has declined from the exceptional levels of 2015 and 2016, we expect the company to continue to generate very strong profitability over the next several years."

Gilbert also disputes claims that nonbanks are under-regulated. He says Quicken is actually more closely regulated than many traditional banks because it is overseen by regulators in all the 50 states where it makes mortgages, plus by government agencies including the Consumer Financial Protection Bureau and the government-backed mortgage entities.

Cecala of Inside Mortgage Finance said that few in the industry are worried about Quicken.

"Despite those general concerns about nonbanks, most people don't have the concern about Quicken, just by their sheer size," he said. "They are the largest nonbank by far, and even though they are privately held, everyone knows that they certainly have the wherewithal to make good on anything they need to."

Contact JC Reindl: 313-222-6631 or jcreindl@freepress.com. Follow him on Twitter @JCReindl.