American Home Mortgage Holdings, Inc.
American Home Mortgage Holdings, Inc.
Total Assets: $58.3 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: AHMH
NAIC: 522292 Real Estate Credit
American Home Mortgage Holdings, Inc. is a Long Island-based holding company involved in the residential mortgage loan business through two wholly-own subsidiaries: American Home Mortgage Corp. and Marina Mortgage Company, Inc. The company concentrates its efforts on selling to new home buyers rather than homeowners looking to refinance. It offers a broad range of mortgage products, including Fannie Mae-eligible loans, adjustable rate mortgages, jumbo loans, FHA-insured and VA-guaranteed loans, and non-prime loans. In addition, American Home offers home equity, second mortgage loans, construction loans, and bridge loans. The company generally sells the loans that it originates, usually within a month, rather than holding onto them for long-term investment. (Co-op loans made in New York City are held until properties reach occupancy.) Although buyers include Fannie Mae, thrifts and smaller banks, securities dealers, and real estate investment trusts, American Home sells most of its loans to major institutional investors. In 2000, for instance, the company sold 24.5 percent of its loans to Fleet Mortgage Corp., 20.4 percent to Chase Manhattan Mortgage Corporation, and 14.7 percent to Wells Fargo Funding. American Home’s line of loan products are offered through three divisions: Retail, Wholesale, and Internet. The Retail operation accounts for 75 percent of all sales. Selective acquisitions since the company went public in 1999 has extended American Home’s reach to the Midwest and West Coast of the United States, growing to a network of 55 community offices in 13 states. The company also does business through joint ventures with mid-size real estate brokerage firms: 50–50 arrangements in which the venture sells loans that it originates to American Home, which in turn sells them to its institutional buyers. The company’s Wholesale Division works with a network of more than 75 independent mortgage brokers, who refer borrowers by submitting completed loan applications for an underwriting determination. American Home’s Internet division, MortgageSelect.com, accounts for less then 20 percent of the company’s loans, but holds great promise for the future. It was the Internet model, in fact, that served as the focal point of the company’s initial public offering. Rather than spending money to build a brand out of MortgageSelect, American Home seeks out destination website partners to offer mortgage services to their visitors who do not leave the host site. For customer support, the company maintains three call centers. This private label approach to the Internet minimizes the amount of money American Home spends to acquire a loan, giving it a significant advantage over online rivals.
American Home Mortgage Corp. Established in 1988
American Home’s president, CEO, and chairman, Michael Strauss founded the business in 1988. Originally from Chicago, he earned a B.S. in business administration from Washington University in St. Louis, Missouri, then moved to New York City. At the outset, American Home was little more than a one-man business operating out of Manhattan. Strauss soon moved to the Long Island city of Melville, where he would be able to recruit from a work force experienced in the mortgage industry. Over the course of the next ten years Strauss built his business, taking a regional approach to growing the volume of loans originated while adding sales personnel. By 1994, American Home had four branches and originated $220 million in loans. By 1998, that volume approached $1.2 billion and the number of branches increased to 12, with locations in New York and six eastern states. Revenues for 1998 totaled more than $20 million, and the company posted a $4.87 million profit. Not only did Strauss reach a juncture at which he felt the need to expand beyond his East Coast base of operations, he also took note of the way the Internet was beginning to have an impact on mortgage lending. He decided that by establishing an Internet mortgage lending business he would be able to quickly realize his desire for expansion.
Strauss introduced MortgageSelect.com in January 1999, making 14 loans for a total of $2.7 million. By July, the business was already turning a profit, a rarity among Internet startups. By October, it was originating more than $60 million in loans per month. American Home’s strategy of co-branding with partners was clearly working, with the company able to forge relationships with a number of major Web sites, including Microsoft’s HomeAdvisor, E-Loan, GetSmart, LendingTree, Consumer Financial Network, RealEstate.com, Loan Web, Iown.com, and Genesis2000. It was on the immediate strength and long-term promise of MortgageSelect that Strauss centered his effort to take American Home public.
In conjunction with the initial public offering, American Home Mortgage Holdings, Inc. was formed on June 15, 1999. In October 1999, the company completed its IPO, underwritten by investment bank Friedman, Billings, Ramsey & Co., offering 2.5 million shares of common stock at $6 per share. Not only did Strauss intend to use the money raised to bolster the infrastructure on the new Internet venture, he wanted to pick up smaller brick-and-mortar mortgage companies to increase market share. He publicly stated that there were two types of acquisitions he was interested in: mortgage or Internet operations that a bank was looking to sell off and traditional mortgage companies. According to Strauss, “These are companies that are unable to realize as high a price for the loans that they create as we are, or companies that don’t have the same technology platform.” Unlike major mortgage lenders like Citigroup, Chase Manhattan, Washington Mutual, and Wells Fargo that were on the prowl for firms that generated between $5 billion and $20 billion worth of mortgages, Strauss was focusing on acquisition targets that generated between $500 million and $1 billion in annual loans originated. Well off the radar screen of the major players, these firms, many of which were struggling to survive, were available at modest prices.
Marine Mortgage Company Acquired in 1999
The first addition to American Home came quickly when in December 1999 it acquired Irvine, California-based Marina Mortgage Company in a $7.3 million stock and cash transaction. Marina, involved in the home mortgage business since 1979, was a significant West Coast retail lender that brought with it 13 offices in California and one in Arizona, thus adding significantly to American Home’s limited presence in the West. Moreover, Marina had its own Internet division, Consumer First Mortgage, which provided a West Coast call center to MortgageSelect. American Home finished 1999 generating revenues of nearly $25 million and a profit of over $3.8 million, despite the cost of starting its Internet operation.
In June 2000, American Home gained a major toehold in the Midwest, acquiring Chicago’s First Home Mortgage Corp. in a stock and cash transaction worth over $7 million. First Home, founded in 1987, was one of the largest independent mortgage lenders in the metropolitan Chicago area. In addition to Illinois, First Home included branch offices in three other states. American Home continued its buying spree later in 2000 when it purchased four branch mortgage offices from New York-based Roslyn National Mortgage Corporation. American Home gained a presence in the Mid-Atlantic region with the addition of Roslyn operations in Columbia, Maryland and Vienna, Virginia, while adding to its Northeast business with offices in West Hartford, Connecticut, and Patchogue, New York. In essence, American Home was able to transform these unprofitable acquisitions by stripping them down to their sales forces, then relying on its own back-office operations. American Home’s strategy proved to be extremely effective. In 2000, the company increased revenues by 135 percent to $58.3 million and reported net income in excess of $5.3 million. Total loan origination also increased in volume by 126 percent to $3 billion. MortgageSelect.com contributed 17 percent of the company’s core business, ranking third among active online lenders.
American Home continued to expand offline in 2001. It acquired ComNet Mortgage Services, the residential mortgage business of Commonwealth Bank, based in Norristown, Pennsylvania. The deal added five branches offices located in Pennsylvania and Maryland. In addition, Commonwealth agreed to provide mortgage loans and services from American Home to its 60 branch locations in Southeastern Pennsylvania. The transaction was expected to add as much as $350 million a year to American Home’s volume of loans. To fund further acquisitions with the expressed hope of doubling the amount of loans it originated for the year to $6 billion, the company made a secondary offering of stock in July 2001, turning again to Friedman, Billings, Ramsey & Co. It sold 2.4 million shares at $10.25 per share, netting $23.1 million.
American Home Mortgage’s continued success is based on three main drivers of growth: accretive acquisitions, a successful model for online profitability, and organic growth in its branch offices.
Several weeks later, in August 2001, American Home used some of the capital it raised to purchase Valley Bancorp and its wholly-owned subsidiary Valley Bank of Maryland in a $5.5 million cash and stock transaction. Originally established in 1952 as the Baltimore Building and Loan Association, Valley Bank served the suburban Baltimore market through a full service branch office located in Owings Mills, Maryland, in addition to an administrative office in Hunt Valley, Maryland. As of June 20, 2001, the bank held $37 million in deposits and approximately $47 million in assets. Aside from increasing American Home’s footprint in the Mid-Atlantic region and boosting the volume of loans originated, Valley Bank was a federal savings bank that brought with it a highly valuable charter that would benefit American Home on a number of levels. Because of its deposits, Valley Bank would be able to supply some of the funding that American Home had been borrowing from major banks such as Morgan Stanley Dean Witter Mortgage Capital and First Union National Bank. Strauss estimated that by drawing on the resources of Valley Bank, American Home could save at least 150 basis points on a loan. “We’re in a business that’s dominated by thrifts and banks, and our costs to carry and fund loans is higher than our competitors,” he told American Banker shortly after the Valley Bancorp acquisition. “This makes us competitive with our peer group.” In addition, Valley Bank’s federal charter also provided American Home with some tax breaks in New York. The company was on pace to originate $7 billion in mortgages in 2001, establishing a growth rate that was quickly garnering attention. After generating $500 million in loans in 1998, American Home began to grow by more than 100 percent, reaching $1.3 billion in 1999 and $3 billion in 2000. At that rate the company was in line to reach $25 billion a year within a few years.
American Home Solutions Launched in 2001
Most of American Home’s growth in loans originated was still the result of its brick and mortar operations. Nevertheless, the company remained committed to its MortgageSelect business, which it continued to believe held great long-term promise. The Internet side of American Home produced several positive developments in 2001. A new online venture, American Home Solutions, was launched in June of that year. Described as an online homebuyers concierge service, the American Home Solutions Web site offered mortgages via MortgageSelect as well as a wide variety of discounts through partnerships with such companies as General Electric, ProCheck, ImproveNet, Allied Moving Services, Select Comfort, Covenant Insurance Company, PeaPod.com, Coldwater Creek, and MarthaStewart.com. Registered visitors to the site were then able to take advantage of discounts on appliances, paint, and hardware; moving trucks; home security systems; home inspection services; homeowners’ insurance; home furnishings; nursery services; and even grocery shopping services. In addition to being available to anyone with access to the Internet, the site was also created as a tool for real estate agents to help them provide greater service to clients.
For American Home, the new Web site was just another way to increase potential traffic for MortgageSelect, which in 2001 established important new relationships with both traditional banks and online ventures. In the first half of the year, MortgageSelect signed outsourcing agreements with three new banking partners: Sterling Bank, Madison Bank, and Insurers Bank. Furthermore, it became the key lender on Planet Realtor. By the end of 2001, MortgageSelect added a number of other financial institutions, including The Bank of Lexington, Community Bank of the Cumberlands, Bank of Frankewing, Security Bank & Trust, Farmers & Merchants Bank-Trezavant, and Farmers & Merchants Bank-Adamsville. In September 2001, Mortgage-Select signed a multi-year agreement with Microsoft to be the exclusive mortgage provider on its HomeAdvisor site. In December 2001, MortgageSelect announced that it had reached a agreement with the popular The Motley Fool financial site to serve as the exclusive mortgage provider to its online Home Center.
With the addition of Valley Bank and its thrift charter, and an Internet model that was proving both profitable and flexible, American Home was well positioned to realize Strauss’ long-term goal of being sheltered from the cyclical nature of the mortgage business, which fluctuated with the rise and fall of interest rates. As American Home continued to grow as a major provider of mortgages, another issue loomed: How much longer could its founder, filling all the top management positions, continue to run the company before turning over some of the responsibility to others?
American Home Mortgage Corp.; Marina Mortgage Company, Inc.
Champion Mortgage Co.; Countrywide Credit Industries Inc.; Prism Financial Group; Bank of America Corporation; E-Loan Inc.
- Michael Strauss establishes American Home Mortgage Corporation.
- MortgageSelect.com is launched; a holding company is formed and taken public.
- The company originates $3 billion in mortgages.
- Valley Bancorp is acquired.
Bergsman, Steve, “Bricks and Clicks,” Mortgage Banking, August 2000, pp. 36–41.
Hochstein, Marc, “Web Lender Cuts Costs by Not Pushing Its Brand,” American Banker, November 23, 1999, p. 9.
Julavits, Robert, “American Home CEO Says Bank Comes With Bonus,” American Banker, August 31, 2001, p. 13.
Padgett, Tania, “Top 100/Providing That At Times Smaller Can Be Better/American Home Mortgage Outshines Big Players,” New York Newsday, June 4, 2001, p. C10.
Shinkle, Kirk, “A Tech-Heavy Offering But Old-School Success,” Investor’s Business Daily, July 12, 2001.
Wipperfurth, Heike, “American Home Builds On Its Foundation,” Crain’s New York Business, October 15, 2001, p. 59.