In a Commoditizing Market, CEO Thinks Service Will Sell

After 18 months spent turning around troubled Resource Bancshares Mortgage Group, chief executive Douglas K. Freeman wants to make it the Nordstrom’s of wholesale mortgages.

The competition is putting its energy into cutting costs, Mr. Freeman said, so he sees an opportunity in emphasizing customer care.

“Not everybody wants to buy their clothes at Wal-Mart,” he said. “There are people who buy at Nordstrom’s, and they buy for a very good reason: They want the different level of service.”

Resource’s goal is to be “the highest-quality mortgage company in the United States,” Mr. Freeman said. “When our customers think of the high-quality side, we want ours to be the name that pops to the top of their mind.”

The Columbia, S.C., company’s new slogan is “Your Partner in Success.” Mr. Freeman said the idea is that Resource’s clients — correspondent lenders and brokers — can expect a superior degree of attention for the higher price. For example, borrowers will be able to make payments at the client’s branches, get bills with the client’s name on them, and call a live operator who will answer with the client’s name and handle their questions.

Mr. Freeman, a former president of Bank of America’s consumer finance group, took over Resource Bancshares in January 2000. The company had lost $8.6 million during the second half of 1999, and it would lose $42.3 million for all of 2000.

The losses stopped with this year’s first quarter, when Resource posted net income of $1 million. The second quarter, with some help from lower interest rates and a strong housing market, also looks strong. In May, Resource boosted its loan production to $1.2 billion, up 113% from the same period a year ago; for the year’s first five months, loan production was $3.65 billion, up 123% from the first five months of 2000.

The company’s share price, which hit a $3 low in April 2000, was around $7.21 late Friday after reaching a high of $8.50 in January.

“We have the bulk of the hard work behind us,” Mr. Freeman said. “Now the real challenge for us is to engineer a business that can work its way through the cyclical nature of the mortgage business.”

For many, servicing is a mortgage lenders’ best hedge against the inevitable stage when rates go up and originations dwindle. The top five mortgage lenders — Washington Mutual Inc., Chase Manhattan Mortgage Corp., Wells Fargo Home Mortgage, Countrywide Home Loans, and Bank of America Mortgage — are also the top five servicers, based on first-quarter data.

But Mr. Freeman said Resource simply does not have the capital to play in the mega-servicing game. (The company’s servicing portfolio is just $8.6 billion, compared with the $455.5 billion portfolio Wells Fargo reported at the end of the first quarter, or the $512 billion portfolio Wamu will have if its deal for New York’s Dime Bancorp Inc. goes through.)

So, to offset the downswings, the company is pushing an outsourced mortgage program to community banks, credit unions, real estate companies, and other financial services firms.

Mortgage lending is complex, which makes it hard for smaller retail banks and credit unions to offer the loans, Mr. Freeman said. They often have to send customers to bigger competitors, losing the mortgage business and giving the rival a chance to cross-sell products that the bank might have sold instead.

“If you’re running a community bank, your customers are refinancing their homes, trading up homes, and moving into your market,” he said. “Our product puts them in the origination business, from the origination to the underwriting to the booking.”

The client lends the money and holds the loan, but Resource says it does everything else, from application to closing to servicing. And it does so in the client’s name, right down to the coupon books.

“It’s not easy to get into the mortgage business — it’s a very confusing, very precise business,” Mr. Freeman said. “Just like in credit cards — you would be hard-pressed to find a small bank that does all of the card work today.” He compared Resource to card-processors like First Data Corp. and Synovus, and argued that the mortgage industry is ripe for this kind of service.

Given that Resource’s customers are businesses, Mr. Freeman said he believes the company can make itself known as a high-end mortgage bank with top-notch service, a feat observers say is very difficult with consumers.

And despite some of the challenges involved in turning around one of the last, publicly traded mortgage banks in the country, Mr. Freeman said the whole effort has been worthwhile. The bigger the company, the less you can see the direct impact of your work, he said, adding that he has enjoyed being at a smaller company than Bank of America.

“It’s been very rewarding and a lot of fun,” he said. “If you go back in, you plot the results over the announced five quarters that we have had our team, we’ve had some very impressive results.” And, he joked, he now has thousands more frequent-flier miles than in his previous life.