Linkage: Quicken Loans Edition

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Quicken Loans is the biggest baddest lender in the country. Actually they’re the second biggest, but they’re definitely the baddest because the rest of the top U.S. lenders are big banks that have the benefit of cross selling mortgages to existing deposit and wealth management customers. Quicken Loans is a mortgage only company and is number two behind Wells Fargo, the largest mortgage lender on the planet.

So this Originations linkfest is dedicated to marking down some themes that I’ll come back to later. The first one is a great overview from The Economist on how they do what they do. Placing three key paragraphs below for those without subscriptions.

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.

But what’s perhaps more important is how they get their business. They are extremely savvy at consumer targeting and acquisition, so it should be noted that their founder Dan Gilbert isn’t interested in Yahoo because he’s “just another billionaire with media ambitions.” He’s interested in Yahoo because he can reach millions more customers to feed the core businesses that made him a billionaire.

Don’t forget: Yahoo’s two most popular destinations are finance and sports, and if Gilbert got it, he’d be able to use it much to the advantage of his two most high profile businesses: Quicken Loans and the Cleveland Cavaliers.

And finally the last link below isn’t on Quicken Loans but rather Warren Buffett, who might finance Gilbert’s possible Yahoo bid. This was from a recent Berkshire shareholder letter on why persistently low GDP might be ok.