The Mortgage Insider

Buy Now

Looking back, the idea of starting a subprime mortgage company seems crazy. That conclusion has nothing to do with the industry’s implosion six years later. When we opened Kellner Mortgage Investments in September 2000, I finally realized just how little I knew about loaning money to borrowers with bad credit. During the first six months in business, I felt no more qualified to pilot the Space Shuttle than to be the president of a subprime lending company.

Seven years in mortgage banking provided a solid foundation, but coming from the ranks of companies like GE Capital, my schooling was largely driven by a conservative mindset. Lending money to borrowers with bad credit was never a part of the curriculum. When I first learned about subprime mortgages, the high-risk nature of the business made me think it was best suited for those who suffered from low morals or head trauma. Lending money to people with bad credit just seemed like a terrible idea. It wasn’t until I got a taste for this business that my feelings started to change.

Taking a position as an account rep for the Residential Funding Corporation (RFC) division of GMAC in 1999 introduced me to the world of niche lending. As the largest securitizer of non-agency mortgages in the country, RFC bought loans that didn’t fit the conforming guidelines of Fannie Mae and Freddie Mac. While most of the products were geared toward borrowers with good credit, RFC was just starting to make a name in subprime. It didn’t take long for me to realize that buying high-risk mortgages held a lot of promise.

A few months before I took the job the subprime mortgage industry imploded the first time, forcing most of these specialty lenders out of business. When the dust settled, RFC was one of the few survivors, which created an opportunity. My income was directly proportional to the revenue I generated, and subprime was three to five times more profitable than any other type of loan we securitized. Even though RFC gave me seven different products to sell, ranging from jumbo mortgages to home equity lines of credit, I ditched most of them in favor of subprime.

While RFC wanted us to push all their products, I saw no logical reason to sell something that made less money and carried no competitive advantage. The best way to succeed, I thought, was to take advantage of RFC’s position in the subprime market.

That was the same year I met Ken Orman, the head of secondary marketing and operations for First Consolidated Mortgage Company, my best customer. It took me only a few months to realize Ken understood the business at a deeper level than most of us. He could look at a deal, size up a borrower, and immediately determine if the loan was a good risk. What impressed me most was how his gut feeling, whether or not to write a mortgage, was usually correct.    

Since he was unhappy with his job and we had quickly developed a mutual respect, I saw an opening and sold him on the idea of starting our own company. Saying I was underqualified to run a subprime company isn’t an exaggeration. Eighteen months at RFC introduced me to this specialty business, but it didn’t prepare me for what I was about to encounter.