After subprime, Bill Dallas takes on big banks

NEW YORK (Reuters) - Bill Dallas, a veteran mortgage executive known best for building subprime lender First Franklin into a Wall Street desirable, is fostering a new firm as the industry consolidates.

Taking a controlling interest in Skyline Financial Corp, Dallas says he is transforming the retail mortgage lender into a "super regional" able to compete with JPMorgan Chase & Co and other big banks that have emerged from the housing crisis with a hammerlock on the $11 trillion market.

Dallas, who is chairman and chief executive of Skyline, said the company can fill a void in the mortgage industry where smaller, independent lenders are becoming scarce as their "warehouse" funding gets expensive or removed. The outlook for independents is also darkened as new regulations chill their businesses, Dallas said.

Skyline, which has originated $750 million this year, will take market share as rising interest rates pinch profits at large rivals, he said.

"While everyone else is going through the turnstile and back down the escalator, that's when we go up," said Dallas from his office in Calabasas, California, the same home base for Countrywide Financial Corp as it toppled competitors to become the nation's top lender earlier this decade.

His bets are widely watched, having played a part in the founding of several financial institutions over three decades.

Dallas's First Franklin was sold five times since its inception in 1981, a history that included a $1.3 billion purchase by Merrill Lynch & Co at the top of the market in late 2006 when home prices wavered.

Dallas formed Ownit, another subprime lender that faced a different fate, after leaving First Franklin in 2003. Ownit was among the first of its kind to fail as Wall Street began pulling the plug on such businesses in early 2007. Merrill Lynch had a 20 percent stake in Ownit.

ORIGINATIONS DROPPING

Dallas said his expectation that big banks would see fewer and more expensive home loan originations was supported last month as big U.S. lenders warned of rising interest rates. Among those was David Lowman, JPMorgan's top mortgage executive, who last month said originations may "come to a pretty hard stop" and fall to $1.5 trillion next year.

Originations are expected to total $2 trillion in 2009, according to the Mortgage Bankers Association.

"All I heard is that next year is going to be terrible," Dallas said of the executives speaking at the October MBA conference in San Diego.

Lowman gave a nod to Dallas's entrepreneurial talents, but his bank is beefing up too. JPMorgan last week said it will hire 1,200 new loan officers to boost its mortgage business.

JPMorgan, Wells Fargo & Co, Bank of America Corp and Citigroup Inc originated 58.6 percent of all mortgages in the year through September, according to Inside Mortgage Finance.

Dallas is betting on sea-change in the mortgage industry that is shutting out smaller lenders that, without the help of banks and Wall Street, don't have the capacity to operate on their own. Independent bankers also will soon be overwhelmed with new regulations, one of which could mean they are liable if closing costs don't match estimates provided at the start of the lending process, he said.

Another law, the SAFE Act, encourages states to raise standards and costs for licensing of loan originators.

"You are going to get this regulatory push to cleanse the system," Dallas said.

The number of brokerage firms has declined to just 10,000 to 15,000 today from 53,000 in the mid-2000s, according to Access Mortgage Research.

Instead of selling loans through banks that compete with them, independent mortgage companies, if they join Skyline, can sell directly to government-sponsored outfits Fannie Mae and Freddie Mac, he said. He partnered with software provider Ellie Mae to provide technology to speed the process.

Skyline has grown to about 200 loan officers today from 25 or 30 a year and a half ago, when Dallas started consulting for Skyline. He is in talks to acquire or partner with five or six other West coast mortgage firms.

Loan officers trying to remain independent are fighting an uphill battle as warehouse credit remains thin and momentum for greater regulation is snowballing, he said.

Scale is important because banks have sharply reduced warehouse credit lines to reduce risk, said Sig Anderman, Ellie Mae's CEO. Banks now prefer to provide lines of $300 million to $500 million to a few loan officers, instead of giving a hundred players $5 million in credit, he said.

"The industry really likes it the old way," Dallas said. "People keep trying to keep the dream alive, and the dream is about to become a nightmare."

(Editing by Padraic Cassidy)