How the story of HomeBanc unfolded and its dramatic speed :
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In examining last week's demise of HomeBanc Mortgage Corp. — the latest casualty in the problem-plagued housing industry — its fortunes seemed to rest on a series of "ifs."
In 2001, HomeBanc had mortgage loan production of $4.1 billion and employed 699 people.
The company would have remained golden if:
• Interest rates had remained at record and near-record lows.
• Mortgage origination volume had stayed robust and customers had continued applying either to buy homes or refinance.
• Wholesale lenders, eager to make money on a red-hot real estate market, had kept delivering cash to mortgage originators.
• Wall Street investors or other secondary market players had continued to buy the pools of mortgages that HomeBanc and others like it were selling.
• The Florida market, which accounted for about 50 percent of HomeBanc's business, hadn't collapsed.
• Investors had given it enough time to right itself when problems arose.
With little wiggle room, the slightest hiccup meant disaster. Unfortunately for HomeBanc, everything hiccupped.
The Atlanta-based firm's parent, HomeBanc Corp., filed for Chapter 11 bankruptcy protection Thursday, three days after announcing it had run out of money to fund new mortgage applications. The parent company, which listed assets of $5.1 billion and debts of $4.9 billion, said it was selling the operations and related assets of the mortgage unit to Countrywide Financial Corp.
It isn't accepting mortgage applications and has exited the business because it no longer has access to credit to fund those loans.
What happened to HomeBanc Mortgage — once the envy of many in the industry — illustrates the problems now dogging the home-loan business.
And it underscores the problem anytime a company depends on factors — some beyond its control, such as Federal Reserve interest rate increases — always being in its favor.
Shifting sands
HomeBanc says the concerns about borrowers' ability to repay, particularly subprime borrowers, hurt the entire industry. And though HomeBanc did little subprime lending — less than 1 percent of the roughly $5 billion in loans it made last year were in that segment — nervous lenders that HomeBanc relied on to fund loans started retrenching. Wall Street investors who purchased pools of loans through the mortgage-backed securities also retreated.
"The majority of the events were not in HomeBanc's control," said Carol Knies, the company's vice president of investor relations. "The mortgage meltdown, the continued negative news about the housing industry, the growing inventory of homes for sale — all of those things have built up. Other mortgage companies that were not able to remain functional just compounded the fear."
If time had been on the company's side, some of the recent moves it had been making, such as paring staff and expanding into other Southeast markets to lessen its dependency on Florida and Georgia, might have allowed it to survived, said Derek T. Watkins, president and chief executive of GBT Mortgage in Cumming.
"I think they probably could have gotten that right," said Watkins, who also is Atlanta chapter president of the Mortgage Bankers Association of Georgia.
But nervous Wall Street firms put on the brakes. With their refusals to provide capital to fund new loans or buy pools of loans because of rising fears about mortgagees' ability to repay, HomeBanc and other companies — including American Home Mortgage Investment Corp., New Century Financial Corp. and SouthStar Funding LLC — collapsed.
"When the warehouse lender pulls out from you, you don't have a way to fund loans," Watkins said. "And when you don't have money to fund loans, you're basically out of business."
Long history
Still, the unraveling of HomeBanc, consistently named by Fortune magazine as one of the best companies to work for in America, was dramatic in its speed.
The company, which traces its roots to 1929 as part of HomeBanc Federal Savings, went through a number of ownership changes before being acquired by First Tennessee Bank in 1995. In 2000, a group of executives in HomeBanc's management team, including Patrick S. Flood and Chicago-based equity firm GTCR, orchestrated a $60 million buyout.
Flood, who took the new company's reins, was hailed as a different kind of chief executive, garnering praise for a faith-based management style that put employees above everything else.
"I focused on the real value in the organization, and that is the people," Flood said in an interview last week.
Flood was with HomeBanc and its predecessor companies from 1985 to his firing in January. "My focus was always on investing in the people and instructing them to do their best work every day."
For example, workers were given 20 hours of paid leave called "being there" time to attend their children's school activities or to volunteer and participate in other family or community events.
The model worked.
In 2001, the company originated $4.1 billion in mortgages with 699 employees. And year after year, the numbers — both origination volume and head count — went up. So did Wall Street's interest.
In July 2004, HomeBanc went public, raising $288.6 million, nearly $52 million more than it expected.
In June of that year, the Federal Reserve instituted what was the first of an eventual 17 interest rate increases. Though HomeBanc still did well, cresting at $6.4 billion in originations by 2005, the rise in the fed funds rate — the rate banks charge each other for overnight loans — from a low of 1 percent to the current 5.25 percent choked off the flow of consumers looking for new mortgages or refinancing.
Adjustable-rate mortgages, which were a popular HomeBanc offering, are particularly sensitive to the fed funds rate.
Besides those increases, there was competition for customers in markets such as Georgia and Florida, where home prices soared.
"They were running a business model that was heavily reliant on volume," said Greg Scott, a 25-year mortgage banking veteran who works at American Home Mortgage Inc. in Atlanta. "They had to have lots of it."
Meanwhile, in 2004 and 2005, a number of hurricanes crisscrossed Florida, HomeBanc's most important market, crushing demand for new mortgages, Flood said.
Yet while the company's volume began to recede, the employee head count exceeded 1,200. Costs associated with having a network of offices as well as expensive deals with developers that gave HomeBanc preferred lender status took their toll.
"You had downward volume and a competitive market," said Darren Crosby, a former HomeBanc mortgage banker who spent nearly 7 1/2 years at the company before starting his own firm, Brayden Capital Home Loans, in June. Seasoned bankers and loan officers began leaving for other firms in the last year, he said, because to compete, they were having to sacrifice some of their commissions so as not to lose customers.
"But as the loan officers left, you still had all this overhead. The pricing wasn't improving, and they had a lot of seasoned, top-producing loan officers leaving in the last six or seven months," Crosby said. "That just accelerated closing the doors."
Late last year, the company embarked on a number of bold measures — cutting staff and expanding into Nashville and Raleigh to diversify its markets.
Then in January, as its share price and market value continued to plunge, HomeBanc fired Flood.
"The board probably thought I was a builder for the past 20 years and that maybe a different kind of leader was needed," Flood said.
The board, like many companies making a change in executive leadership, gave him the face-saving option of resigning, but Flood said he refused. "I'd rather be fired and have people know that I wouldn't have quit on them."
He said he cut about $20 million in annual expenses before the board replaced him with Kevin D. Race, HomeBanc's president, chief operating officer and chief financial officer.
"We were doing as much as we could without wrecking the organization," said Flood, who has formed a new mortgage firm, Covenant Mortgage Corp.
With more time, HomeBanc might have made it, he said.
"My best way of explaining it is if you've ever been in an undertow, if you try to fight it, you drown," Flood said.
"Sometimes you have to let it take you to wherever it takes you and then you can swim to shore. They got caught in a terrible storm."
How the story unfolded
• 1985: Predecessor company becomes HomeBanc Federal Savings; future CEO Patrick S. Flood hired.
• 1993: Mortgage loan production hits $500 million.
• 1995: HomeBanc acquired by First Tennessee Bank.
• 1996: Company reaches mortgage loan production of $1 billion and 275 employees.
• 1998: Mortgage loan production hits $2.6 billion.
• 2000: Flood and private equity firm GTCR lead $60 million buyout of company from First Tennessee.
• 2001: Company reaches mortgage loan production of $4.1 billion and 699 employees.
• 2002: Operations expanded to Jacksonville and Charlotte; mortgage loan production at $5 billion and work force at 854 employees.
• 2003: Ranked No. 39 on Fortune's "100 Best Companies to Work For in America" list; mortgage loan production at $5.9 billion and employees at 1,180.
• 2004: HomeBanc goes public, reports annual loss of $48.3 million.
• 2005: Company posts annual loss of $11.6 million.
• 2006: Company cuts 60 jobs, posts annual loss of $6.5 million, begins reorganization plan.
• Jan. 16, 2007: Flood fired.
• Aug. 3: Shares delisted from New York Stock Exchange.
• Aug. 6: Company announces cessation of new mortgages, sale of related assets to Countrywide Financial.
• Aug. 9: HomeBanc files for Chapter 11 bankruptcy protection.
Source: HomeBanc, staff research
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