Securitization pioneers Lewis Ranieri and Marcia Myerberg are back in the mortgage finance world with a new venture, an Internet business that links consumers directly with mortgage lenders, thrifts and commercial banks, bypassing mortgage brokers. Called Root Markets, the new business will be linked to Internet portals and newspaper sites.
Root Markets aims to simplify the process of finding a mortgage loan by directly linking consumers with the actual mortgage banks that will keep the loans on their portfolios or resell them into mortgage bonds. By linking the end buyers of a mortgage loan directly with borrowers, Root Markets hopes to bring down costs for home buyers.
The new venture also brings in Mark Korrell to be chief marketing officer at Root Markets. He is a mortgage industry veteran who was a former chief executive at Residential Funding Corp. (RFC) and GMAC Mortgage Group. Myerberg is chief executive of the new firm and runs its day-to-day operations. Ranieri is its chairman.
Ranieri probably needs no introduction to Wall Street, because his days at Salomon Brothers were chronicled in Michael Lewis' Liar's Poker, a bestseller that has become required reading for business students. After Salomon, Ranieri founded Ranieri & Co. and Hyperion Partners, private equity firms where he serves as a director and chairman. He has run thrifts, homebuilders, boat builders and recently served on the board of software company Computer Associates, which he is credited with helping survive a scandal in its executive suite.
Myerberg was treasurer of Freddie Mac in the summer of 1983 when the housing agency created and sold Wall Street's first CMO, with the help of a group of bond jocks at Salomon Brothers' mortgage group, run by Ranieri, and Credit Suisse First Boston's mortgage group, run by Larry Fink, who today is chief executive of BlackRock.
Myerberg would join Ranieri at Salomon two years later, where the two introduced American-style mortgage finance to the U.K. and they would also help start up ARM lender RFC. RFC was eventually snapped up by General Motors Acceptance Corp. (GMAC), General Motors finance arm.
With Root Markets, Ranieri and Myerberg hope consumers will be able to bypass some of the middlemen and deal directly with lenders.
Consumers will be able to choose lenders who are offering certain types of loans. Root Markets gets a fee - $30 to $40 per loan - from lenders any time a consumer asks that lender about loan information. "We link the borrower directly with the end lenders. The borrowers chose the lenders," Myerberg said.
While Root Markets is designed to help consumers get loans to buy homes and refinance mortgages, Myerberg believes that many of the early inquiries will be from consumers looking to refinance loans with rising monthly payments. She saids lenders that have signed up to the Root Markets mortgage loan exchange include JPMorgan Chase, Charter One Bank, E-Loan and First Franklin Financial.
"The Web as a medium of commerce didn't quite live up to its promise. As a medium of information, it blew it away," says Ranieri, adding that the Web, "with its enormous reach and amazing efficiencies, is ruthlessly the lowest-cost channel."
When it comes to the state of the housing finance market, Ranieri and Myerberg are pretty appalled. Both are quick to point out social problems that the rise in defaults and foreclosures creates, and Ranieri hinted that he can't help but feel a bit responsible because of his role in the development of securitization.
"None of us who are capital markets people are free of guilt," Ranieri said. "I take some pride in trying to be able say something in my public speeches. [But] I could have yelled louder or screamed more."
Ranieri has been warning of possible flaws in the housing finance machine for at least two years, even at a time when the housing boom appeared to have no end. In April 2005, when prices of homes were jetting higher and sales were routinely hitting record levels, Ranieri questioned the use of adjustable-rate mortgages. Back then, speaking at a Milken Institute conference, Ranieri warned that "some of the innovations [in mortgage lending] are kind of dangerous."
When it came to ARMs, Ranieri questioned the use of these loan products, "especially when rates are going up." The Federal Reserve had started raising rates the previous summer. Ranieri warned in the spring of 2005 "that the movement into ARMs, for some, is incredibly dangerous."
"Leverage was always a two-edged sword. Everybody was so busy talking about the benefits of leverage [that] nobody wanted to talk about the downside of leverage," Ranieri said. "Leverage is O.K. when you have the financial wherewithal to delever when you have to. But if you don't have the financial wherewithal, you get your head cut off."
This spring, Ranieri offered another warning that investors in the world's largest credit market probably should consider. "Two years ago, I started saying there was a potential problem. There's a big hole in the fence. Everybody is running through that hole," Ranieri says. "The checks and balances were no longer working."
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