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Is Bill Dallas Back?

Once head of a billion-dollar subprime machine, Bill Dallas hopes his latest venture will launch him back to the top of the mortgage origination market

In 1981, William “Bill” Dallas founded mortgage lender First Franklin, and for nearly 30 years, he led the company through multiple ownership changes before its final owner, Merrill Lynch, closed it in 2008.

Since then, Dallas was involved in a number of mortgage-related companies, and while he wasn’t in the business of writing loans, he kept himself busy with other projects. Now he’s back.

If he’s successful in his newest venture, Skyline Financial, Dallas believes he can change how borrowers and the mortgage industry do business.

Dallas, an Ohio native, graduated with a liberal arts degree from Bowling Green State University in 1977, but wasn’t sure what to do with his life. He eventually developed a passion for mortgage origination, which led him to California and to starting First Franklin.

“When you come out of school like I did and don’t really know what you want to do, you have the view that you want to find something that you’re as passionate about as I’ve been with home mortgage, and you want it to be as successful as it’s been,” Dallas, 53, told HousingWire from his Southern California office.

Not so unlike today, the early 1980s were a rough time for the mortgage industry. Dallas says it a lot of ways, it was worse.

“If you were alive in 1979-1981, that was a bad market. No loans, 20 percent interest rates, and you had Iran, oil and unemployment,” he said. “You had everything you had today, except there were no loans and 20 percent interest rates.”

But the 22-year-old CEO persevered, and his company grew and the market began to improve.

By 1994, the San Jose, Calif.-based First Franklin had grown from a small California-based retail brokerage to a regional wholesale lender with a multi-billion-dollar servicing portfolio.

In need of capital to keep the business growing, Dallas sold First Franklin in the first of what would be four ownership transactions in the company’s history.

The first buyer was DLJ Merchant Banking Partners, a unit of Donaldson, Lufkin & Jenrette, or DLJ, the investment bank that has since evolved to Credit Suisse First Boston.

The deal, worth $36 million, closed in August 1994, with Dallas retaining leadership of the firm. But as interest rates went up, “the world sort of cratered around them,” Dallas said of the new owners, who wanted out after less than two years.

The same year that Dallas sold First Franklin to DLJ, Bank of America purchased the Chicago-based private equity firm Continental Illinois Venture Corporation, now known as CIVC Partners. To this day, CIVC Partners runs as a semi-autonomous firm with Bank of America backing. With capital from CIVC Partners, Dallas led the repurchase of First Franklin in 1996, in a deal estimated to have been worth $266 million.

In 1999, then-President Bill Clinton signed the Gramm-Leach-Billey Act, also known as the Financial Services Modernization Act of 1999, essentially repealing a 1933 law that prohibited a firm from existing as any combination of investment bank, commercial bank or insurance company. Banks could now operate as holding companies, and in the same year, First Franklin was sold again, this time to Cleveland-based National City Bank in a deal worth $325 million.

“It was amazing,” Dallas said. “It was funny, it’s not something you set out to do, it just sort of ended up that way.”

National City Bank owned First Franklin through the early 2000s and the company flourished in the housing and subprime mortgage boom, specializing in 100 percent loan to value mortgages. By 2003, First Franklin was reportedly originating $30 billion in new loans every year and employed more than 2,000 people. Dallas compared the experience of First Franklin’s to that of being a player on a special sports team.

“I’ve been one of a few people that’s been able to grow a business, especially a private mortgage banking firm, and compete against all the big players and still be successful,” he said.

In 2006, National City sold First Franklin to Merrill Lynch for a reported $1.3 billion. In addition, Merrill Lynch purchased a $6 billion portfolio of subprime mortgages. The deal was one of four in a period when the brokerage was trying to enter the mortgage industry. Despite the success, things did not end well at First Franklin.

In 2008, Merrill Lynch declared First Franklin was worthless, shut the operation down and alleged National City misrepresented the extent of the losses the unit experienced from defaulted mortgages. It was just one of many missteps that led to the near-collapse at Merrill Lynch, and its eventual acquisition by Bank of America.

Dallas said the boom didn’t fool him, and he knew it wouldn’t last forever, but acknowledged he had a hand in the subprime fallout.

“When you started seeing what you saw starting in 2004, when you saw massive home price appreciation, you knew it wasn’t sustainable, but people were acting like it would last forever,” Dallas said. “We tried to stop people, but at the same time our business fueled it. We did 100 percent purchases at First Franklin, but my view was I was just trying to help first-time homebuyers.”

When Bill Dallas talks about his career in the mortgage world and the future of mortgage finance, it’s with the same excitement that one would expect he had when he started First Franklin in 1981. He passionately speaks of helping borrowers get loans with an almost humanistic and socially conscious sense of duty.

“The only way I think people can really get ahead is owning a home. When you start to look at raising your family and being able to put a roof over your head and provide for them, but at the end of the day have that asset be your retirement plan, it’s pretty special,” Dallas said. “Plus, all the tax advantages that come with owning a piece of real estate make it the eighth wonder of the world.”

For Dallas, working in the mortgage industry means being a part of the fabric of the American culture.

“You see that right now with how important it really is because you had this massive correction in home values and look what it has done to the psyche and the rank and file of the American people,” he said. “The government is willing to do anything possible to save it, because it’s so important.”

In today’s market, Dallas sees his job as helping people get back on their feet.

“It’s like an escalator at the mall. We’ve got a lot of people right now going down the escalator, and our job is to pick them off one at a time and get them on the up escalator, and figure out how to profit from it.”

A Fresh Start

It’s a new day in the mortgage world and Dallas said he’s ready for his new company, Skyline, to take advantage of what he sees as the greatest opportunity the industry’s ever seen.

“The hole that we’ve dug is so big and so deep that most people are avoiding our industry like the plague. There’s no leadership, very few people in it, and the banks have inherited it all,” Dallas said. “There is a place in my view, for a well-capitalized independent mortgage company.”

In May 2009, Dallas’ equity firm, Dallas Capital, invested $1.5 million for control of Skyline, a company Dallas estimates has a total net worth of nearly $5 million as of the end of 2009. The mortgage lender focuses primarily on purchase mortgages and has 156 loan officers in seven offices, and in December, was projected to fund $800 million in mortgages during 2009.

The Skyline business model calls for the lender to acquire mortgage companies and use the referral-based books of businesses and personnel these companies already have established to grow its business. The company is highly invested in mortgage technology, and will run a virtually all-electronic business between Skyline’s various outlets.

The emphasis on technology is how Dallas said he can compete against large banks and other lenders. Depository institutions have funding costs as much as 400 basis points below the price Dallas pays to fund loans, not to mention the overhead costs of a traditional brick-and-mortar retail operation. The technology, Dallas said, eliminates the need for traditional retail shops.

“My job is to not have to have brick and mortar, not to have big huge locations. I’ll meet you anytime, anywhere, any way to get a loan done, but you don’t have to come to my physical office because I don’t have. Those costs, through cycles, are too hard to bear,” he said.

The profit margins for mortgage lending aren’t what they were during the subprime boom. Cost-cutting is a crucial part of Dallas’ plan. A technology-driven automation system streamlines the origination process and helps reduce errors and promote efficiency.

There’s no room for error, but there’s also a level playing field across the industry, because there is no difference in the mortgage products lenders can offer, they all meet Fannie Mae, Freddie Mac or Federal Housing Administration (FHA) guidelines.

Dallas believes borrowers want the mortgage process to be more computer-based, but still want the guidance of a skilled loan officer. At Skyline, Dallas said loan officers will approach customers with a “concierge” customer service approach, rather than a “broker-driven” operation.

“The focus is on the output of consumer satisfaction, not so much the output of how much do I make per loan,” Dallas said.

Skyline is a Fannie, Freddie and FHA approved lender. Eventually, Dallas wants the company to service its loans, through the use of a third-party private label servicing operation.
Possibly the biggest challenge facing Skyline, and the mortgage industry as a whole, is regaining customer trust.

“The consumer distrusts financial services in general, whether it’s an investment advisor who lost a 401(k) or the guy who recommended they buy a home,” he said. “What you’re going to see is the next few years is going to be about rationalizing that and making sure we’ve earned the consumers trust back. That’s going to be slow, deal-by-deal, loan-by-loan, but we need to do that. It’s almost like you have to start each loan application with an apology.”

Part of that process will be a strong emphasis in FHA lending for borrowers with impaired credit — the same borrower profile First Franklin built its growth off of with its subprime products. Dallas expects a significant portion of Skyline’s originations to be FHA loans, which offer low down payments and government-insurance against default.

“I like FHA. It powers purchases,” Dallas said. “It’s going to have to end up being the solution to a bunch of credit-impaired people who hurt themselves in this last cycle, because we have to sell them homes again.”

He believes Skyline can provide a much-needed service with FHA loans for these borrowers, who he believes are worthy of the risk.

“You try and do a loan with somebody that qualifies, you take a little bit of risk because the customer could be a first-time homebuyer, but you’re banking on Americans, real blue-collar, ‘I want to buy a home’- type folks,” he said.

Dallas said he sees outlook of today’s market and the prospect for success as even higher than they were when he started out. Looking back, he said, if he’d realized how bad the market was in the early 1980s, he wouldn’t have gotten in the business. He’s got the same energy and focus as he did in 1981,
“but I’m not quite as stupid as I was back then.”

Only time will tell whether Dallas’ experience will lead him to success as he takes on the mortgage world head-on once again.

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