Among the investment banks that have entered wholesale mortgage lending, UBS AG stands out - and not only because it is trying to build a business organically.
This year, several Wall Street firms have been buying originators just to supply raw material for their securitization desks. But the Zurich company, which in January began funding brokered loans across the United States under the name UBS Home Finance, is selling some of them to its correspondents and to competitors.
Doing so helps UBS offer competitive mortgage rates, said Peter Slagowitz, a managing director in UBS' New York office and the chief executive of its home finance business. The plan is to act as a "stand-alone mortgage entity" and not "a feeder business," he said.
Mr. Slagowitz is aiming high. "In terms of alt-A and jumbo loans, we don't see why we shouldn't be in the top 10 on a short-term basis," he said.
At the Mortgage Bankers Association's annual convention in Chicago last month, UBS distributed a flier, intended for correspondents, that proclaimed, "Together we can build the world's most powerful mortgage company."
UBS wants to "give the best rates out to the field" while maximizing its margins, Mr. Slagowitz said. That is why it is willing to sell loans outside its own conduit, which won't always make the best bid for a loan.
"We search for the best execution on loans, which maybe means selling them to what have traditionally been our competitors," he said. UBS puts the names of other banks and conduits on the rate sheets it sends brokers (though Mr. Slagowitz showed his Wall Street roots by referring to them as "bid lists").
Several observers called this approach unusual for an originator affiliated with an investment bank. Marc Geredes, the president and chief executive of LownHome Financial, a start-up wholesale lender in San Jose that is part-owned by Goldman Sachs Group Inc., said he could sell loans to other Wall Street firms but has yet to do so.
Jeff Verschleiser, a senior mortgage manager at Bear Stearns Cos. Inc., said that, "if other conduits or correspondents had a different view on value, we would absolutely consider" selling to them. "We would never take any option off the table." He oversees Bear Stearns' residential lending business.
UBS hired Mr. Slagowitz in 2002 from what was then Credit Suisse First Boston to help build the conduit business it had opened the year before. Like other investment banks, UBS decided it needed an in-house origination capability to ensure a steady flow of loans for the conduit.
Late last year, Mr. Slagowitz said, he realized that to attract and retain talented account executives, and to keep brokers and correspondents loyal, an originator must consistently offer low rates - though not necessarily the lowest.
"I don't want to win on price. I want to win on service," he said. The wholesale market has proven "over and over again" that you can win loans on service as long as you are close on price, he added.
When it comes to service, UBS promises brokers "agency-style delivery on a nonagency product." For example, according to Mr. Slagowitz, its automated underwriting engine has an internal scoring model that gives definite answers on more "borderline" loans than other lenders' systems. The share of applications that the system "refers" for manual underwriting is "significantly lower" than the industry average of 25%, he said.
The UBS business plan surprised some bankers and analysts.
Bose George, a mortgage analyst at Keefe, Bruyette & Woods Inc., said buying an existing originator would probably be easier than dealing with the start-up and management costs of creating a business organically. "That instantly seems a bit harder because they are not in the business at all," he said of UBS Home Finance. "It seems a little easier to just buy a platform."
A glut of struggling mortgage banks for sale has created a buyer's market, he said, mentioning Bear Stearns' deal to buy Encore Credit Corp.'s subprime origination platform for $26 million (to be completed in December) and H&R Block's plan to sell its Option One Mortgage Corp. "It's a trivial amount of money for them," Mr. George said of Bear Stearns, and "clearly there are lenders that want to get out of this business."
Mr. Slagowitz was hesitant to discuss the possibility of acquisitions but didn't rule them out. "Our focus right now is organic growth from within," he said.
UBS began offering option adjustable-rate mortgages in September and plans to expand its product offering to include "alternative-B" loans in the next few months. Eventually, UBS' wealth managers could cross-sell loan products to existing customers, he said.
It outsources mortgage servicing - which experts said is the most difficult business segment for a new company to manage - to Cenlar Federal Savings Bank, a subservicing specialist in Ewing, N.J. UBS Home Finance maintains a processing center in Denver and a correspondent facility in Shelton, Fla.
Unlike most Wall Streeters in the mortgage business, UBS enjoys federal preemption because it has a national bank charter. (The other notable exception is Lehman Brothers, which has a federal savings bank.)
The company plans to move all its home finance operations and licensing to Florida once its regulator, the Office of the Comptroller of the Currency, has approved. The move would make possible a lower tax rate and let UBS charge prepayment penalties on mortgages during the first three years, a practice permitted in New York state for only one year.
Michael D. Youngblood, an analyst at the investment bank Friedman, Billings, Ramsey & Co. Inc., was skeptical of Mr. Slagowitz's regulatory strategy and business model.
"Managing a mortgage banking business requires very different skills than managing an investment bank," he said, especially because compliance issues have become "nontrivial" in today's marketplace.
LownHome's Mr. Geredes agreed with that assessment. "Wall Street firms are great on loan valuations and characteristics that lead to performance or nonperformance," he said, but "don't know too well how to operate a mortgage entity." (Mr. Geredes is the former head of First Franklin Financial Corp., which Merrill Lynch & Co. has agreed to buy from National City Corp.)
Mr. Youngblood said the largest barrier to entering the mortgage market is developing sufficient flow, especially when volume is declining and competition intense. "It's very easy for anyone with capital to pick up a telephone and start calling brokers," he said, "but it's very hard to do that business over time and build a franchise that maintains a reputation."
Attempts in earlier decades by Wall Street firms to create internal origination businesses did not last, he said. "The fact that a well-compensated investment banker has a new investment bank and touts it as the cat's meow is not surprising. I've heard that since 1985."
UBS has kept quiet about its origination activities for most of the year, but Mr. Slagowitz said he is now "ready to really push it" in what he sees as a promising market.
Though starting a business in a weakening market might appear strange, the timing lets UBS develop its systems and products without worrying about an influx of volume, he said.
"With the Fed slowing down its hikes on interest rates," he said, "we are hoping to be set up nicely for the next refi wave."
