Interview With Founder and CEO of Security 1 Lending, Torrey Larsen

Monday, 29 March 2010 18:05

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This month, The Reverse Review had the privilege of sitting down with the Founder and CEO of Security 1 Lending, Torrey Larsen.  Lately, Security 1 Lending has undoubtedly been making waves in our industry and it is clear that this fast paced, aggressive company is poised and ready for a successful future.  In this interview, Mr. Larsen gives us excellent insight into the necessary items any Reverse Mortgage company must successfully employ to navigate through these rapidly changing times.

Without further ado:

2010 is starting with some dramatic changes to the reverse mortgage industry, how do you see S1L positioned in the current environment?
We believe chance breeds opportunity - During periods of dysfunction, you can identify, leverage and position your company to grow in the long run and that’s how we’re approaching everything right now.  The changes have been dramatic but I think there are three components that we must focus on and be very good at in order to succeed.
The first is Compliance.

We're in a different age of the compliance and regulatory environment and the dramatic changes can seem overwhelming for companies.  Not only is it the type of change that is overwhelming, but the sheer pace at which these changes are coming about is tremendous as well.  When I look back to the start of S1L 3.5 years ago, it was really a very simple industry. Now the community is growing and whenever new entrants come into the market, liquidity comes as well.  I’m positive that we will begin to see significant changes in the way the industry takes shape. 

I think we've all already experienced this over the last 24 months. So, I think the regulatory environment, and S1L’s ability to manage and navigate through it will differentiate us from many other companies.  We are very fortunate to have one of our shareholders, Bill Traske as our Chief Compliance Officer.  Bill has been in the QC and compliance arena for about 20 years so when I look at Bill, and he’s making a decision on how our company needs to operate, I know he's protecting the asset that's very near and dear to him - the stock of the company - and that also protects me and the entire firm.  We've got a great leader in that area and we are on top of it.  I would stack us up against any other firm relative to the compliance side.

The second is period of Consolidation.   
The word has been out there for 20 years that yield spreads are going to go away so there’s always been that fear.  In my opinion, that type of change is more realistic today than it ever has been.  This is the first time I remember where the Secretary of the Treasury has testified before congress and actually mentioned yield spread as an issue relative to the melt down of the mortgage industry - which is shocking!

So now it’s on the front page and over time, if they do make significant change on that front, it is going to require brokers to make changes in the way they do business.  I think that as long as S1L is a strong, viable, well-capitalized mortgage banking operation, we will be positioned during those periods of change to basically bring companies, entities and individuals into our firm to make it stronger.  So we see 2010 and 2011 as a period of industry consolidation.

The third is the development of the Capital Markets
I grew up in the capital markets and so it's really interesting how liquidity has played such a dramatic role in the pricing of the fixed rate outcome.  There are a lot of people constantly asking why yield spreads continue to rise.  Why are premiums continuing to rise? And finally, is that sustainable?

Its economics 101, there is huge investor demand for this product.  They like this product because pre-payment fees aren’t through the roof like on the traditional forward side meaning your assets aren’t going to run off through a refinance boom.  This asset is pretty predictable in terms of the revenue stream making it attractive to this investor base.  Those characteristics fuel the want for more of the product but at the same time the industry is down 54% in the last 6 months.   Therefore, you have excess demand coupled with a dwindling supply and only one thing can happen: prices will go up. 

But that's in the short term.  As long as we get through this next threat of another potential principal reduction, I think supply will start coming back to the market, there will be more of a balance, and you'll see prices come back to a more reasonable level.  Nevertheless, the current environment is unpredictable.  They always say, “the trend is your friend”, I believe that to be true.

What are some major initiatives for your company within the next 6 months?

We have 2 main initiatives.
First, we acquired a group out of Washington and with them, have had great success penetrating the Credit Union and Community Bank market.  We think it’s an underserved market and there's a need for this product and those clients.  Alternatively, Credit Unions and Community Banks like the idea of teaming up with companies like us.  We can support their customers but they do not risk valuable clients going to one of the other big depository institutions and from that transaction they start to take away the deposits and the checking and other services.  Instead, it works better to do business with a neutral party, someone like S1L, which is not a depository institution.  We are precise and experienced in executing Reverse Mortgages on behalf of their clients and then we won't be going after that client for other services - they feel very comfortable with that.  Their only concern is that they’re teaming up with the right company. 

Secondly, we want to be more involved with organizations such as NRMLA and MBA.  This is something we’ve only recently begun to focus on, but we have to have more of a presence.  We do have people who sit on committees, and Shannon Hicks has spoken at the last two road shows.  So we've got some key people who are known entities within NRMLA but I personally want to get more involved in their efforts to figure out how to improve the image of this product. 

I think that's critical at the consumer level.  We have some internal lobbying to do within FHA, HUD and to the politicians who shape policy.  I think all three of those avenues have to be managed pretty aggressively and I think NRMLA is taking some good steps right now but I think there is a lot more to be done, and its about protecting the industry as a whole.  Craig Corn from Metlife has done a phenomenal job recently in taking some initiative on that front.  I think we just need more involvement from more people who are dedicated to the long-term success of this industry.

What role will brokers play in the Reverse business?

We have a lot of brokers - I think they continue to play a vital roll and I think the percentage of market share that they capture will drop overt time.  That being said, I think that their market share is still very significant. 

It will come down to this: there's been a weeding out process over the last 24 months and the veteran shops need to take a balanced approach to the business.  They must take a view from a marketing perspective and present this product to seniors appropriately and with transparency. 

Companies also need fundamentally good financial management controls so that they know their ROI and they're acting as very shrewd business people.  I think the companies that do those two things, plus focus on compliance issues, are going to be strong players for years to come.  The role of the brokers will continue to be important, but overtime, their market share will continue to diminish.  I think they are a viable and great alternative to some of the big banks.

Yield spread premiums have gone up sharply in 2010; do you see current prices leveling off?  If not, can the industry sustain these levels?

I do not see these levels being sustainable in the long run.  I do see price levels coming back over time and again we see a better balance between supply and demand for the product in the capital markets.  I think the high yield spreads can be somewhat problematic, especially for the broker because the broker has to disclose that premium to the borrower.  As an industry, we're talking about taking costs out of the equation for the borrower, yet the borrower is going to see this yield spread which could be upwards of $6,000, added to the GFE.  Even though that cost is not coming directly from the borrower, its coming from the lender, the overall perception of the compensation package seems to be going through the roof.  This is not good for the image of the industry.  It’s just a matter of dealing with that and educating the consumer in what the yield spread represents.

How is S1L trying to lower the cost of doing a transaction for the senior?
Cost structure is really the key and I think everyone looking at our industry is focusing on it.  We recently came out with our “Security Savings Program”, which has eliminated the monthly servicing fee, lowering overall cost of the transaction and providing additional proceeds back to the borrower by having zero monthly servicing fees.

So the borrower will get great proceeds back from the transactions with a lower monthly cost.  Those are immediate things we're focusing on.  In the long term, we're focusing on the origination structure within our company to insure that the consumer is getting a great deal in comparison to our peers in the marketplace.  We'll continue to keep an eye on competitive factors and implement internal examinations as to what we believe is a fair compensation for the service we provide the senior.
Baby Boomers are becoming more comfortable with the Internet and social media, what are S1L's plans in adjusting to the trend?
 
This has been a real focus for us in the last 6-12 months.  We've become very proficient in our search engine optimization marketing and we are getting very precise in our ability to reach the right demographic in the right manner. 

What I mean by the right manner is the manner in which they want to be contacted and the means by which they want to interact.  We have focused a lot of time and energy on that side of the business and that falls right in line with the baby boomers.  We know that demographic is an absolute force that is growing everyday they are very comfortable with the technology including social media. 

On the social media side, we have a presence on Facebook and Twitter.  We know that the fasted growing demographic on Facebook is elderly women over the age of 65 who are trying to connect with their kids and grandchildren.  They are becoming very comfortable with that technology and interacting with it more.  For that reason, we as a firm have to be prepared to assess and interact with them over a platform they feel comfortable with.  This makes Facebook very key in this industry when you think about that statistic.

Additionally we are focusing on the difference between an online experience and a traditional "offline" experience.  The two are radically different and we want to bridge that gap.  If they're going to interact on the front end through technology, we want that to be a world-class experience.  We're looking at video technologies and live chat because it’s clear that they want immediate responses from a friendly responder.  

Then, we're trying to take that technology and way of reaching the senior to couple it with the way they want to transact the business.   If they want to continue down the path of dealing with a call center or the technology side, we can take that from cradle to grave for them and that’s one of the reasons we acquired Omni Reverse – it’s for that expertise.  A lot of them want to gather info and be educated through the technology experience but then transact the business over the kitchen table.  So our retail sales force is very broad and diverse right now and we want to take a good chunk of those leads and distribute those to our traditional retail loan officers, if that is what the consumer wants.  So time will tell which way of fulfilling the business is actually preferred by the senior and I think that will change over time as people want to do everything via technology instead of just initial research.

NMLS and regulatory agency are playing a much bigger role in the mortgage industry these days, how do you see these changes affecting the way people do business?
I think it’s’ having a huge impact: first of all, it’s weeding out the uncommitted originators.  There is an entire segment of the origination force that's doing this part time, on the side, or as a hobby and the amount of time and effort they have to put into the licensing process, is significant.  So what it’s doing is the people who are not very serious or not very committed to this business have made a fundamental decision that the time and effort is not worth it relative to licensing process. 

This is healthy.  You're going to end up with a sales force that is more specialized.  They're experts at what they do.  Individuals who do a loan once a quarter can't live on that, plus they're not in the business every day so the likelihood of them making mistakes with that borrower is much higher.  The licensing process helps get rid of them.
 
The second thing I know has happened in the first quarter of 2010 is that the originators are so focused on the registration and passing the national test that they have to put a lot of time and effort into that, redirecting their focus away from the origination.  I think that has played a huge role in the drop of originations from October 2009, until now.  So I think as we get over the hump, people will be able to refocus exclusively on originating and we're going to start seeing production numbers hit their stride. 

Transparency to that borrower is the key to everything.  We have to do a better job reducing the overall cost to consumers and we have to be spot on relative to the education we provide to the consumer in terms of accuracy and clarity.  They know what they've got, they know what they're paying for and there are no surprises.  If we do that collectively as a group, we're going to be in great shape and this business will continue to grow and evolve and it’s going to be exciting.