The American way. (Cover Report: Origination Strategies).

The fourth incarnation of a mortgage company run by veteran mortgage banker John Robbins has spawned a firm that has taken off like a shot. The timing for launching American Mortgage Network in the midst of a production boom appears impeccable.

THE HEADLINE IN THE 1991 ISSUE OF SAN DIEGO BUSINESS JOURNAL read, "Robbins Helps Mortgage Company Rise from the Ashes." and the ensuing article went on to explain how John Robbins had built a company called American Residential Mortgage Corporation three times.

Twelve years later, Robbins is building his mortgage company a fourth time, but in this manifestation it's called American Mortgage Network (AmNet), San Diego.

It's been a wild, roller-coaster-like, 20year run for Robbins, and in all the corporate changes and startups over that period the man has always ended up on his feet and ready to charge again. This, however, could be the last go-round for Robbins, and he seems to want this iteration to stick.

AmNet originates mortgages for the national mortgage broker community through its network of regional centers and over the Internet. It's a wholly owned subsidiary of American Residential Investment Trust Inc., a publicly traded real estate investment trust (REIT) that decided to de-REIT in 2001 to allow for the expansion of AmNet.

What has caught the industry's eye is the fact that from concept to the present--a 15-month period--AmNet has posted some fairly impressive numbers. In the fourth quarter of 2001, the company's first full quarter in operation, loan production reached $43 million. One year later, in the fourth quarter of 2002, loan production jumped to $1.9 billion. Over that initial 15-month run, AmNet loan production totaled $4.159 billion.

"The results were above expectations," says Robbins. "We had an exceptional year. Our plan all along was to take business in the first year to a half-billion a month, then we funded $681 million in December, so we exceeded our goal." To which, he adds, "We are on our way to becoming one of the larger publicly traded mortgage banks."

A long history in a short time span

It takes a short historical discourse to figure out how Robbins arrived at this point in his career--building another new mortgage company. He started, and became president, of ICA Mortgage Corporation in 1983 under the aegis of parent company Imperial Savings Bank, San Diego. Two years later, Imperial sold ICA to First Nationwide Bank, the San Francisco--based subsidiary of Ford Motor Co. In 1987, ICA's name was changed to American Residential Mortgage Corporation.

After four stable years, First Nationwide decided it was time to divest American Residential, and in 1990 Robbins and other top executives teamed up with New York-based venture capital firm Welsh, Carson, Anderson & Stowe to buy the company at a bargain price of about $12 million. The venture capital firm put 525 million into the company. This recapitalization enabled the firm to obtain a warehouse line and other debt financing. It went public in 1992 and did a second follow-on offering in 1993.

Even then, Robbins had a sense of where the industry was headed. In the company's 1993 annual report, he noted, "Mortgage bankers have become the predominant source of residential mortgage banking in the United States. Our collective market share surpasses thrifts and banks, and we believe that's unlikely to change. What seems likely is a consolidation in the mortgage banking sector."

It was a prescient statement, because one year later the company was acquired by New York-based Chase Manhattan Bank. Welsh, Carson, Anderson & Stowe's initial investment of $4 per share turned into $28.25 a share in less than four years when the company was bought for $368 million.

There was about a two-year period where Robbins disappeared--gone fishingl--before storming back in the summer of 1997 with the creation of another venture, American Residential Investment Trust, a residential mortgage REIT. It turned out to be a rare misstep in Robbins' successful career.

Perhaps it was all those days in the sun, casting his line and watching the hook sink into the water, that when Robbins came back his timing, for the first time in his professional career, was definitely off--although it didn't look that way at the very start. In the mid-1990s, REITs were very much in favor by Wall Street, and Robbins, seeing a window of opportunity, acted quickly. American Residential Investment Trust was founded in February 1997 and went public before the end of the year. "As a REIT, we had the highest institutional book of business of any REIT that had gone public," Robbins recalls. "Eighty-five [percent] to 90 percent of our investors were institutions."

Unfortunately, Wall Street's delirium over REITs ended in 1998. "We were the last REIT out before the window shut-- it really slammed behind us," says Robbins. At that point, external factors such as an international debt crisis turned against the REIT industry, roughing up American Residential as well.

All REITs, even mortgage REITs, continually need new sources of equity to thrive, and once Wall Street turned off the spigot on new offerings, it became extremely difficult to raise capital. American Residential never had an opportunity to grow larger. "The average REIT that survived the cycle was 10 times our size, and it became very hard to compete against them given that we had limited access to equity," Robbins says.

There were other problems as well. Those institutions that initially were seen as a stabilizing factor weren't. The big investors continually sold shares even in the face of a seller's market, always undermining the price of American Residential stock.

The biggest problem was the interest rate situation. Because mortgage REITs hold mortgages and live off the spread, when interest rates began to decline, early prepayments picked up. "Assets are purchased and then amortized over a period of time," says Robbins. "If they are prepaid early, they represent losses."

With a public company, stockholders vote on significant corporate changes, so in a note to stockholders in 2001 (the year American Mortgage Network was formed), Robbins laid out his case for change:

* Rebuilding revenue streams and profits is the best way to maximize stockholder value.

* The mortgage REIT's capital structure and size did not allow access to low-cost funding.

* As a REIT, the company paid out 95 percent of taxable income in the form of dividends, and a continued dividend payment would not permit the company to execute a growth strategy.

Michael McMahon, a managing director at Sandler, O'Neill & Partners, San Francisco, would argue that running a mortgage REIT, with a heavy dependence on asset acquisition and portfolio management, takes a different skill set than Robbins had developed in his past top management posts.

"It's no surprise that Robbins would go back to where his strength lies," says McMahon. "And he has considerable strength in mortgage banking."

Reformation and formation

In August last year, the American Residential Investment Trust stockholders voted to de-REIT and go forward as a mortgage banking concern. The company relinquished its REIT status in the first quarter of 2003.

In preparation for its new life, American Residential Investment Trust moved from the New York Stock Exchange (NYSE) to the American Stock Exchange (with the removal of REIT status, the company would not be able to meet NYSE listing standards).

Physically, in March 2002, it also moved to a new headquarters in north San Diego, mostly because it needed more space. The company's work force grew from a staff of 75 in the fourth quarter of 2001 to 366 at the end of 2002.

Robbins also recruited a number of seasoned executives who had worked for him under previous corporate entities. One of those key players was Judith Berry executive vice president and chief financial officer of American Residential Investment Trust. She worked with Robbins in the old American Residential Mortgage days, from 1984 to 1994.

"There are certainly some very astute mortgage bankers doing what we do on a regional level. What is unique about our model is, although it is looks like a small mortgage banking company model, we are doing it on a national scale," says Berry. "We operate a lot like those regional players in that we do not retain servicing and we try not to go head-to-head with the major brands."

Funded through a warehouse line, which in March 2003 totaled $710 million, one of its biggest lenders is J.P. Morgan Chase & Co., New York.

"J.P. Morgan is the administrative and collateral agent on one of AmNet's primary warehouse facilities," explains Cynthia Crites, senior vice president of corporate mortgage finance at J.P. Morgan Chase's offices in Houston.

"We have known the executive management team led by John Robbins for many years, so when Judy Berry at AmNet called, we were very excited for the opportunity to put a warehouse facility in place for them. The management team is extremely experienced and has a solid reputation in the mortgage industry," says Crites.

J.P. Morgan is very pleased with the relationship, Crites adds. "The company continues to perform very well and is always great about communicating with us on a regular basis regarding new developments. We feel that we have a strong partnership with AmNet."

AmNet serves the wholesale channel, dealing only with mortgage brokers, While mortgage brokers process the loans, AmNet underwrites and closes those loans.

Part of AmNet's business model is based on the presumption that the mortgage broker will continue to dominate at the point of sale, says Berry. "And as long as mortgage brokers are in control of the loan origination process, they are going to need someone to fund their loans," she says.

Because American Residential sells its servicing, it is actually free to partner with servicers and, as Berry says, "take advantage of their competitive pricing."

AmNet sits in an odd niche. While it sometimes competes with the big mortgage wholesalers such as Countrywide Home Loans, Calabasas, California; Wells Fargo Home Mortgage, Des Moines; Chase Manhattan Mortgage Corporation, Edison, New Jersey; and the like, AmNet performs a valuable service to these same firms as well--selling the loans originated by AmNet.

"There has been a huge consolidation on the servicing side of the business," Berry says, "and mortgage bankers such as ourselves represent an attractive volume loan opportunity for a Countrywide, Wells Fargo or Washington Mutual [WaMu]. We can sell them a half a billion a month of high-quality, reliable production."

Countrywide, Wells Fargo and WaMu are three of the biggest buyers of AmNet loans, says Muir Atherton, who, along with Anna Martinez, are co-heads of AmNet's capital markets department. Both Atherton and Martinez also worked at American Residential Mortgage.

"A large percentage of our loan production is being bought by Countrywide; it's buying a variety of products," Martinez adds. "Wells Fargo is also very active."

Through 2002, AmNet sold 54.2 billion of loans. "Every loan we originated," says Martinez.

Countrywide not only supports AmNet through a conduit relationship, but also provides a financing facility through Countrywide Warehouse Lending and access to capital markets through Countrywide Securities Corporation.

"Countrywide was one of the first investors to work with AmNet and its successful roll-out of the lending division," notes Charlene Koeppen, a vice president of correspondent sales at Countrywide's Scottsdale, Arizona, office. "AmNet's strong management team and business model have kept them on track and headed for continued success.

The network

In order to affect a national reach, AmNet figures it needs to open what it calls regional sales and underwriting centers across the country. Each center would be staffed by 20 to 25 people, including a group of four to seven account executives, a manager, operations supervisor, underwriters and support personnel.

"The centers are receiving loans, generating Good Faith Estimates, handling regulatory documents, locking in loans, issuing product information, doing follow-up and closing loans," says Jay Fuller, executive vice president of production for American Residential Investment Trust and American Mortgage Network.

By year-end 2002, the company could boast 18 full-scale, regional offices.

Although AmNet counts 45 states where it is currently approved to do business, it won't establish a regional sales and underwriting center in each state. As Fuller figures it, there are 30 metropolitan statistical areas (MSAs) in the United States that do 63 percent of the business, and that's where AmNet will be--eventually.

By the end of 2004, Fuller's objective is to have 28 offices. However, he's holding off on Detroit and Las Vegas--the former because AmNet hasn't identified any candidates for the office, and the latter because "I'm not convinced our model will work well there," says Fuller. "Mortgage brokers in Las Vegas tend to offer a high percentage of subprime loans, and these are not the kinds of loans we do well."

If anything, AmNet has been targeting the opposite end of the market--it has an emphasis on mortgage loans for higher-credit-quality borrowers, which is typically referred to as "A" paper.

Fuller is another American Residential Mortgage old hand, having served as executive vice president and chief administrative officer prior to the company being purchased by Chase Manhattan. His process for filling out the network is to hire people locally, identifying candidates who he thinks have the right leadership capabilities, are well-known in the market and have a good reputation.

"We set out to bring in very experienced people," adds Lisa Faulk, executive vice president of operations at American Residential Investment Trust and American Mortgage Network.

"Initially, we actually overhired from the standpoint of the experience level, but we caught up quicker than expected. When you grow this fast, you have to rely on having high-caliber people and not take your eye off fundamentals."

Of the 12 centers operating throughout 2002, the busiest by far were San Diego, with loan volume of $111 million in December 2002, and New Haven, Connecticut, with December volume of 5109 million. Together, those two markets accounted for 32 percent of all AmNet's loans in December. Also achieving a large share of business by December were Roseville (near Sacramento), California, at a loan volume of $72 million, Atlanta at $64 million, Minneapolis at $58 million and Denver at $55 million.

The stand-alone regional centers operate in roughly 5,000 square feet of space and are expected to do $80 million to $100 million a month when their operations are finally at a "mature" level. Fuller reports that as of March 2003, six centers were hitting the $80 million target.

"The hardest thing for operations is to give the regions timely feedback on what they are doing," says Faulk. "Again, when you are growing quickly you really need more time to be exact, so we have taken a little more informal way of communicating with biweekly phone calls to operational managers. Then I have a more formal, quarterly meeting with every operational manager in the country."

Oddly enough, says Fuller, the biggest problem has been dealing with success. "We have much more volume than we thought we would have. In 2002 we grew 30 percent a month, so the challenge has been how do you get enough office space, how do you get enough technology in place, how do you get enough product out there, the warehouse lines, all the things that need to be in place? It takes a bit of a juggling act."

AmNet, like other companies involved in the mortgage business, has been helped along by systems improvement.

"Technology has played one of the most pivotal roles in the company because it enables us to help our branches," says Randy Myres, AmNet's senior vice president of technology. "When we started, we had the Web site and there were very few loans coming through. Now the brokers are using the Web site more and more, and we keep adding features that will make their jobs easier.

The company's goal, Myres adds, is to empower the broker to have control over the lending process. "That includes locking in, drawing docs, getting rates, qualification and searching for the right program. It also includes the back-end delivery system where we can get the loans out the door to the investor. The whole essence of the business is how quickly we can originate, underwrite, close and deliver," he says.

Change is for the better

Looking back now, American Residential Investment Trust was handicapped from the start and never attained momentum. Slowly, it was able to improve its total interest income from $68.4 million in 1998 to $86.5 million in 2000. Yet, in 2001, total interest income dropped to $56 million. From 1998 to 2001, the company was not profitable, its net loss per common share hitting a record-high $2.29 in 2001 following the buyout of the REIT's management contract.

The company went public at $15 a share, and in early 2003 was trading at $4 a share. "Our goal is to get our stock price up to our initial IPO [initial public offering] price and beyond," says Robbins. The vehicle to do that is the mortgage bank.

"We said that by the first year the mortgage bank would be profitable, and we exceeded that by a significant degree," Robbins adds.

In December, the company adjusted upward its fourth-quarter earnings guidance to be at least double that previously given, $0.20 to $0.30 per share based on consolidated net income of between $16 million and $2.4 million. It did even better than the adjusted estimates.

American Residential Investment Trust reported consolidated net income of $4.7 million, or $0.59 per diluted share, for the fourth quarter of 2002, compared with a net loss of $3.5 million, or $ per diluted share, for the third quarter of 2002. Inclusive of startup costs associated with the formation of its mortgage banking subsidiary, the company also reported consolidated net income of $1.6 million, or $0.20 per diluted share, for the year ended Dec. 31, 2002.

"Over the past 12 months, we have fundamentally changed the revenue base of the company and improved our long-term earnings prospects," Robbins comments. "[Last year] represented a crucial turning point as American Residential transformed from a mortgage REIT to a mortgage banking company."

Less than a year after its startup, AmNet posted four consecutive months of profitability, according to Robbins.

"This is a good time to be a mortgage banker," notes Sandler O'Neill's McMahon. "The industry just completed its two best years ever in terms of origination. It looks like 2003 will also be a good year. Longer term, the challenge will be to see how well they do in a higher interest rate environment when production volume declines and there is pressure on profit margins. Those will be very challenging times."

While recognizing that in the mortgage banking business, you are only as good as last month's production," Robbins claims his company can make money by selling its loans and letting others do the servicing. At the same time, balance-sheet risk is eliminated.

"If you look at Chase, Wells, Countrywide, WaMu, the size of their portfolios are so gargantuan and the cost of servicing per mortgage is so low, there is no way we could compete," says Robbins. "This model lets them pay more for the product we sell and they eventually service than we could make if we serviced it ourselves."

AmNet has two big things going for it, says Robbins: not incurring startup risk as the company is monetizing its current assets on a present value basis (also valuable in creating an income stream); and the fact that it is one of the largest sellers of loans to Countrywide, one of the biggest servicers of loans.

Actually, the company probably has a third thing going for it: The executives of AmNet have decades of mortgage banking experience through all sorts of economic cycles--much of that time spent shoulder to shoulder with each other.

"The people at AmNet have been together a long time," McMahon observes. "They know each other and have been successful in the past. They've carved out a niche between the big wholesalers and smaller brokers where they can create value. My bet is they are going to make it."

Asked if he ever got tired of starting and restarting companies, Robbins shrugs. "You're never to old to start over again. Besides, whoever said you can't teach an old dog new tricks? I love to work."

Steve Bergsman is a freelance writer based in Mesa, Arizona. He can be reached at [e-mail].