WALTER P. BLASS : Still Banking on the Future : Bullish Mortgage Firm Homes In on Ever-Growing Need
When the mortgage industry was shrinking 2 1/2 years ago in the face of dwindling demand, Walter P. Blass said confidently that his Newport Beach firm would tough it out.
“We’re waiting for the sun to shine again,” he said. “It always has and it will again.” The sun did indeed shine again, especially for his company, Shearson Lehman Hutton Mortgage Co. in Newport Beach. Since he took over as chairman five years ago, the company has become one of the nation’s largest providers of home loans and mortgage servicing, essentially payment collections.
Now, as the parent brokerage firm restructures operations and the mortgage industry faces a downturn, Blass is pushing his firm to grow even larger.
Blass is trying to transform the Shearson Lehman unit into one of the leaders in the mortgage loan servicing business. The company has purchased land in San Bernardino, where it plans to build a facility capable of processing nearly half a million loans annually. Now among the top 10 loan service operations in the nation, the company hopes to vault into the top spot by the mid-1990s.
The energetic, 43-year-old mortgage banker recently discussed local market trends and his company’s bullish plans with Times staff writer James S. Granelli.
Q. Real estate is a cyclical business. Where are Orange County and Southern California in that cycle?
A. Well, I think it’s hit its peak for this time in terms of values and demand. Probably we’ll spend the next two or three years on some form of down slope. How deep it gets is a function of a lot of things yet to play out, but I’m probably more bearish than most of my friends in Orange County about demand for housing.
I do a lot of informal surveying on price levels--surveying of people who are builders and others in this industry--and most people who live in Orange County tend to feel it can’t go anywhere but up. In the long run, I think it goes up, and it goes up big. But we have hit our peak, in my opinion, and there’s going to be some pressure here. (Interest) rates are more likely to be up in the near term than they are down. The problems are exacerbated every day in terms of pressure on rates, and if we have a very high rate environment, I think the problems for real estate in general will be significant. People in Orange County, particularly in the last two years, have been stretched to their fullest capacity. They used every bit of their money just to buy the brick and mortar. And so, as these rates come up, there’s not another segment that is easily going to get into that market. I don’t think there’ll be a catastrophe, and I’m not suggesting that. But I do think it’s going to be weaker than most people in Orange County would think.
Q. How does that compare with the rest of the country?
A. Well, there clearly appears to be a set of regional economies taking place. And they all have their own peaks and valleys. They’re more pronounced now than they were 10 or 15 years ago. You can go over to one part of the country and things are hot, and in another part they’re lukewarm. Then, three years later, those two things flip. It’s interesting to me because it means that the country as a whole doesn’t take a dip at once.
Q. And that’s true of the real estate market too?
A. The biggest problems in real estate start on the commercial side, but the psychology of real estate is immediately picked up on the residential side. The psychology that gets transplanted immediately into the general public is that real estate is soft. Psychology, in my opinion, is what moved Orange County real estate. Supply and demand did too. But psychology really moved it more. When people think things are going up, they will bid ‘em up on the anticipation they’ll go up.
Q. The so-called peace dividend--reduced defense spending as a result of worldwide political changes--could have a major impact on the Southern California economy. Are home lenders taking that into account now?
A. What we’ve done in the last year is tighten up and play heads-up ball with underwriting. We’ve really gone back to basics in terms of underwriting to assure ourselves that people buying houses today are buying them at prices that are reasonable and that they can afford to pay the mortgage and that their job security is such that you know we expect them to be comfortable.
Q. No more competition on low rates, introductory rates, quick-approval process and so forth?
A. It’s significant reduction, and I think that the craziness is going to continue to go away. There’s not as much as there was a year and a half ago, and certainly the deep-discounted teaser rates are gone because almost every lender now has a discipline of selling the loans in a secondary market, and a secondary market is unforgiving in terms of stupidity. If you do something stupid, you pay for it immediately. Now, if you’re going to put it in your loan portfolio and keep it, you can get away with it for years.
Q. Have you noticed any increase in delinquencies over the last few years?
A. Not in California yet. California’s been excellent. Keep in mind, delinquencies in foreclosures are lagging indicators. They don’t show up until after the thing’s happened.
Q. Pressure on interest rates is one aspect of the mortgage market. Another is the shrinking presence of the savings and loan industry, which is making fewer loans. Is there less money available for mortgages?
A. There’s been an unbelievable growth in the entry of commercial banks into the single-family residential mortgage market. Their growth is almost as spectacular as the S&Ls; getting out. All around the country commercial banks--Security Pacific, Bank of America, Citicorp--are getting into single-family business.
Q. It’s mainly the major banks, then?
A. Yes, the majors, and I think the minors will follow. There are some good reasons for that. First, the new capital requirements give significant advantage to having single-family mortgages on the books. Second, a lot of the major banks have quit international lending because they were burned. Finally, the commercial real estate market is falling apart around the country, and the same is predicted here in Orange County. That’s another market they’re exiting from. All that money has to go somewhere. So the combination of all of these things is leading them in one direction. Commercial banks are moving into single-family lending at a speed that I didn’t predict, and I’m awed by it.
Q. Is mortgage money still coming in from the capital markets, the Wall Street investors?
A. That will never shut down in my opinion. The only thing that will change that market is price. Everybody taps into that eventually, even the commercial banks will. What’s happened is that the craziness in pricing, which is easing because the S&Ls; have gone away, has allowed everybody to compete at a level where profitability now looks a lot better than it did two years ago.
Q. But if the mortgage market is flush with cash, won’t that create pressures to discount interest rates?
A. It could. I think it’s a very competitive. In my judgment, the market still has more capacity than it needs. There are more people on the street (offering mortgages) than are really needed. And if business continues to be slow, somebody may go in and start a price war, which will be in the consumer’s best interest. But I haven’t seen a lot of that. I have not seen that any bank has done anything the way a thrift used to do only 2 1/2 years ago, such as offering a 7% start rate when the market says it should be 8%. That kind of pricing is not available.
Q. With high home prices making it more difficult to afford a home, particularly in Orange County, what is the mortgage industry doing to help people buy homes?
A. Something like 13% or 14% of (Orange County) residents can afford to buy a home here. Any time the gap gets like that, values start to slow down, if not drop. In the long run, if people cannot afford houses, they’re not going to buy and you can’t support the housing values for long. Either it has to slow down so people’s incomes can catch up or the housing prices have to drop. Something has to happen. That’s a market that’s being propped up on psychology. And so I think that natural forces take over, and bring the demand back into line.
Q. Mortgage money is available, but people aren’t buying. Aren’t banks and other lenders eventually going to take that money and invest it elsewhere?
A. Well, you’ve got to take a long-term perspective. This business has peaks and valleys. If you’ve got a long-term strategy to be in the mortgage business, you look past those fluctuations. You just run your business during both parts of the cycle so that it doesn’t catch up with you in the other part of the cycle. And I’m convinced that that’s what these major banks have.
Q. We have inflation surging a little bit, people again talking about recession and interest rates rising a little.
A. Yes, and we have the Japanese backing away from our capital markets, probably because of their (economic) problems.
Q. And the Japanese are not investing in real estate as much as they were, right?
A. Yes. And then there’s the “peace dividend” (the catch-phrase for the economic benefit derived from reduced U.S. defense spending), which may be negative for the (Southern California) economy because it could shut down some of our defense plants.
Q. With all those factors, where is the housing market going to be in Orange County and Southern California six months from now?
A. Well, I think that the positive thing about Orange County, and California in general, is the migration of people into here. Even though defense may take a hit, there’s plenty of jobs being created. So we have one thing that’s very positive.
Q. Those jobs will absorb the unemployed defense workers?
A. I assume so. Plus we’re taking jobs from Los Angeles. And we’re taking jobs from Texas and the North. I think this is a very attractive market. But we’ve got to understand that when only 15% of people can afford a house here, there has to be at least a slowdown to let that catch up. People have to be able to qualify and earn their mortgage. We have loans in all 50 states, though probably 30% of our portfolio is in California. It’s very important to understand the value of housing because if it goes down, I’ve got to get the money back.
Q. Shearson Lehman Hutton has undergone some large layoffs in a restructuring. How does that affect Shearson Lehman Hutton Mortgage Co.?
A. The process that the company went through affected us in the sense that every division and subsidiary was asked to explain its business, how it made sense and whether it should be expanded, contracted or sold. We went through that process, like everyone else, about a month ago. We came out of that process with the mandate to grow this company. There’s no secret that we are a Wall Street firm and that the fortunes of Wall Street have not been what they used to be. This revisiting of strategic thinking, while unusual, is certainly warranted.
Q. So your company is restructuring and your industry’s growth is flat at best. How do you plan to cope?
A. The first thing we’re going to do is expand our servicing capability, which is the heart of the mortgage banking business. We’re buying land near San Bernardino and building a facility that will be able to service about 500,000 loans. We currently service about 200,000 loans. We’re eighth in the industry. The 500,000 loans would create a $50-billion servicing operation, which would be first or second in the industry. We expect to be among the top three--if not the largest--loan-servicing firm in the nation in four to five years.
Q. What about loan growth?
A. We’re growing the business in a number of ways. Our lead product is the home equity product. Right now, we’re at the pace of closing somewhere around $60 million a month and, we believe, we’re the largest supplier of home equity lines in America.
Q. Home equity loans or lines of credit are basically second trust deeds. What are people doing with those loans?
A. Our product is aimed at a very upscale market. And most of the people, it appears, use it to invest in other property, in their own businesses or to replace more expensive debt. But 20% of our home equity lines are first mortgages. I think it gives the customer incredible flexibility, even as a first mortgage, because the revolving feature lets you pay down the loan and borrow more later without reclosing the loan. I think this is a product of the future.
Q. How much do you have in your portfolio?
A. We have $800 million in equity lines on the books, and we’re adding $50 million to $60 million a month. By the end of the year, we’ll do $100 million a month. It’s a big business for us.
Q. And you’re keeping those loans rather than selling them in the secondary market like mortgage bankers do with first trust deeds?
A. The second part of this home equity business is to turn them into securities and sell them. We’re going to turn this into a mortgage banking product--originate the loans, sell them to investors and service the loans.
Q. Why is mortgage banking a good business?
A. Well, it hasn’t been a great business. It suffered tremendously when all this overcapacity (availability of mortgage money) led to tremendous price problems. We had 50 branches four years ago, and I shut every one of them because I couldn’t compete on a retail basis. I’m not alone. A lot of companies shut most or all of their branches. Now, we work out of one building, no more branches. It’s all done with telemarketing and advertising. The idea is to pick up the phone and call us. We’ll mail you everything. We also have agents around the country.
