Lee Smith talks about Flagstar's growth strategy for 2024

Thanks for having me, Diego. Looking forward to this conversation.

Yeah, Lee Smith, President of Mortgage at Flagstar. I've been here 10 and a half years. I originally came to Flagstar in 2013 as the Chief Operating Officer and then moved to the President of Mortgage role in August of 2020. Flagstar is a $110 billion bank following the merger with New York Community Bank in December of 2022. We then acquired Signature in March of 2023. We have a significant mortgage business. We're one of the top bank originators. We are the fifth largest subservicer of loans in the country. We have a big servicing platform, and we're the second largest warehouse lender. So we're a big player across the board in the mortgage industry.

Yeah, I don't think anybody sets out to be in mortgage. You sort of fall into it, and once you fall into mortgage, it's tough to get out. But I was working for a private equity fund called MatlinPatterson. They were the majority shareholder of Flagstar. When we made some management changes in 2013, we put Sandro DiNello in as the new Chief Executive Officer, and at the same time, he asked me to come on board as the Chief Operating Officer. So that's how I got into Flagstar and ultimately into mortgage.

Yeah, so it didn't change the mortgage business per se because we were already a large originator, servicer, warehouse lender, MSR lender. But what it's done is given us tremendous scale. We were, prior to the NYCB merger and then the acquisition of Signature, Flagstar was a $26 billion bank, and as I say, we're now part of a $110 billion bank. So we've got a bigger balance sheet, more capital, more liquidity, more firepower. So we're able to do more from a mortgage point of view in terms of hold more mortgage loans on the balance sheet. We've got more capital to dedicate to the MSR asset. And obviously, because we're bigger, we're able to lend more from a warehouse lending or MSR lending point of view. And then I think the final piece of the jigsaw as part of the Signature acquisition, we acquired this cash and treasury management team that specialize in helping mortgage companies, and now that sits within the mortgage vertical. So we describe ourselves as a one-stop shop. It doesn't matter whether you're the biggest fund in the US investing in mortgage assets or you're an individual borrower, if you come to Flagstar, we can take care of you. We can buy and sell loans, we can buy and sell MSRs, we have the ability to do our own RMBS securitizations. We do subservicing, and as I mentioned, we're the fifth largest subservicer in the country with almost half a trillion dollars of mortgages on our servicing platform. We can provide financing solutions through our warehouse lending, MSR lending, servicing advance lending business, and now we can offer cash and treasury management services to make sure that those mortgage companies we're working with are optimizing the liquidity they have from that treasury management angle. So we really are a one-stop shop, sort of the full mortgage lifecycle.

Yeah, no, the strategy for us is to be the preeminent name in the mortgage industry, so we can do it all. I think some of the names that you mentioned, who we respect enormously, are non-banks, so they don't have the ability to lend and they don't have the ability to provide that cash and treasury management expertise. But being that we're a bank, we're part of a much more diversified business model to begin with because we are part of a bank, and obviously we benefit from deposit funding, which is more efficient than funding your business in other ways that non-banks traditionally have to. So we want to gain market share, but we want to do it in the right way. We want to grow in a safe and sound manner. We're not looking to grow too quickly. And I think what we're focused on is the overall customer experience for the clients that we partner with. So someone can come to Flagstar and they can buy loans or MSRs from us, but we can also subservice for them and we can provide them with lending solutions. So they're not just coming to Flagstar with one problem that we can solve; they're saying, 'Look, we need to sort of do all of this,' and we can say, 'Hey, we've got a solution for everything that you're looking for, and you only need to come to one place, and that's Flagstar.'

I don't think right now you need to pay M&A premiums in order to grow. I think you're able to grow through lift-outs or hiring good people. And so I think there's a lot of opportunity in the market right now given the dislocation that is enabling certain mortgage businesses to grow without having to pay an M&A premium. And so that's how I look at the growth strategy. It's been opportunistic when the right opportunities are there, and just given how tough the market is at the moment and the dislocation it's creating, there are a lot of opportunities out there.

Yeah, I think there's two things that we've done. Number one, you've got to make sure that you right-size your cost structure to the size of the market. If you go back to 2021, I mean, we were in excess of a $4 trillion mortgage market, and now this year, 2023, it's probably going to be a 1.6, 1.7 trillion dollar market, which is a 65% reduction. And I think you've got to right-size your cost structure appropriately, and we've done that. We've taken 65% of our cost infrastructure out from the high point of where we were in 2021. And I don't think everybody has been as aggressive as that. And the Fed has said rates are going to be higher for longer, so 2024 is going to be a tough year as well, and you've got to make sure that you're solving for profitability, not market share. You've got to be focused on profitability, so you've got to get that cost structure in line with where your revenues are. I think the other thing that we've done, as I mentioned, is we've got that diversified mortgage model. So while the origination business is tough, the servicing and subservicing business is doing very well. The MSR asset is worth a lot more in a rising rate environment, and our mortgage finance business and the cash and treasury management part of the mortgage vertical are performing nicely. So we've got that diversity within the mortgage vertical, as well as having that diversity across the entire bank model, which is helping us in this rising rate environment.

Yeah, I mean, as I mentioned, we've right-sized the cost structure. We want to be profitable in every part of the mortgage business, and I think we've done the heavy lifting as it relates to that. And we want to make sure that we're just providing our customers with the best experience possible and making it as easy as possible for them to do business. So I don't like the impression or the saying either, 'survive until 25.' We've been in the mortgage industry 35 years. Flagstar is not going anywhere. So we will be around in 2024 and 2025 and beyond, and we're here to serve our customers. I think you are going to see further consolidation and dislocation, and when those opportunities present themselves and if it makes sense, then we'll look to take advantage of those opportunities.

Diego, thanks very much for having me, and I'm very much looking forward to The Gathering in April.