This article was updated Feb. 5 to include comments from Guaranteed Rate.
It took a few years, but Victor Ciardelli has finally captured the one that got away. The founder and CEO of Guaranteed Rate, which originated $73 billion in mortgages last year, has made joint ventures and acquisitions a cornerstone of his growing business.
In 2017, Guaranteed Rate struck a deal with the largest real estate brokerage conglomerate in the country, Realogy, to form a landmark joint venture. It has paid off in spades: the combined company, Guaranteed Rate Affinity, originated $5 billion in loans during the first half of last year. In July, Guaranteed Rate launched another prominent joint venture, partnering with independent brokerage @properties, which has 2,800 agents, operates in 15 states and is the undisputed king of Chicago’s resi scene.
But one JV in particular had eluded him. Several years ago, Ciardelli attempted to partner with Social Finance, commonly called SoFi and a heavy hitter in the student loan space with outsized ambitions in the mortgage industry, multiple sources told HousingWire.
There was just one problem: SoFi already had a dance partner in California-based Stearns.
“They shut the door in his face,” said one person with direct knowledge of the talks. “It went nowhere.”
Guaranteed Rate, however, disputes this characterization and says the company had never previously contacted SoFi.
In acquiring Stearns last week, Ciardelli bought a $20 billion lender that gives him direct access to the wholesale channel, sports a number of highly profitable joint ventures, and brings a network of talented underwriters and compliance specialists into his growing apparatus, now nearly 10,000 workers strong.
But the move also introduces a number of challenges for Ciardelli: enmeshing a conservative culture at Stearns that contrasts dramatically with the aggressive, sales-first culture Ciardelli has pushed at Guaranteed Rate; integrating Stearns’ fading retail operations into his own team’s; and, perhaps most importantly, navigating the expectations and wishes of private equity investors whom sources believe are targeting an independent public offering.
HousingWire spoke to nearly a dozen current and former executives and workers at both firms on the condition of anonymity to assess the Stearns acquisition and preview what could be on the horizon for the lender, which is now firmly among the 10 biggest in the country, and is gunning for the top five.
The sticky, complicated business of JVs
Though the partnership with SoFi will generate more conversation, it’s actually an under-the-radar JV that will make Guaranteed Rate’s accountants quite happy.
In 2016, Stearns struck gold. The lender reached a deal with KB Home, one of the largest homebuilders in the country, to launch a joint venture called KBHS. Quarterly statements filed with the Securities and Exchanges Commission show that the deal generated about $619 million in originations during the second quarter, and about $1.9 billion in the nine months that ended Aug. 31. Stearns and KB Home each have a 50% stake in the joint venture, though Stearns handles the operational element.
“It’s a cash cow,” quipped one former Stearns executive. “It’s pure purchase business. The deal really works because Stearns and KB both have a lot of lawyers and compliance folks and it’s airtight.”
Another person with direct knowledge of the JV said KB Home is the real crown jewel in Stearns’ JV portfolio, which also includes Premia, a relocation company, CityWide, and Home Alliance Mortgage.
The KB Home JV in particular is “really well positioned because of the move-out-of-the-city thing and the Millennial buyers, because they’re a first-time homebuyer builder predominantly,” the person said.
In fact, several sources told HousingWire that during Stearns’ bankruptcy in 2019, companies that were interested in acquiring the lender were most interested in the JV businesses.
“The business is 99% purchase, it’s resilient, it’s sticky,” one source said. “As your partner grows, you grow.”
While JVs can bring consistent purchase business, limit risk exposure and grow brands in new markets, they’re challenging enterprises to run. A deal with a national retailer can’t be structured the same way it would with a residential brokerage, or an insurance company or student loan specialist.
“There’s a lot of JVs in the industry,” said one industry veteran who’s put several together. “Eighty-percent of them are… the technical term would be f—d up, because most start correctly, and then because they’re really complicated to run, people get lazy or they think, ‘There’s got to be an easier way to do this,’ and of course there always is, but not necessarily in a compliant way. And people end up with a shit show on their hands.”
Multiple sources described the Stearns joint-venture with SoFi as occasionally headache-inducing. SoFi managed to originate nearly $2 billion in mortgages in 2020, but the company has often fumbled the handoff to Stearns, several people told HousingWire.
In some cases, the customer representative on SoFi’s end would get a lead but not have the requisite knowledge about mortgage products or enough details about the customer to effectively get the deal to Stearns, former Stearns employees said. There were also layoffs in SoFi’s mortgage division and a restructuring in 2018.
How SoFi’s own plans to go public at a $8.6 billion valuation may impact the partnership down the road remains somewhat fuzzy. SoFi is determined to capture as much of the high-earner-not-rich-yet market as possible. Anthony Noto, its CEO, spoke at length last week about the opportunity to capture the wealthy unbanked, particularly with mortgage products. SoFi is a small but growing player in jumbo mortgages and has a direct line to high-earning grads with eye-popping debt from the nation’s top medical and law schools.
Industry executives believe there’s sizable upside in the deal for Guaranteed Rate. Ciardelli will fight tooth-and-nail to keep the terms with SoFi in place, and will hope to boost SoFi’s retail side to increase origination volumes, one insider believes.
“He’s wanted that business for a long time,” the person said.
Opposites attract?
When Blackstone Group’s private equity division struck a deal to grab a majority stake in Stearns in 2015, the culture soon came to reflect the financial giant’s approach: be steady, and don’t do anything to embarrass the firm. Not that Stearns was considered a fiery, aggressive lender anyway.
“The company’s definitely been pretty old-school for a while,” said one former executive. “Stearns LOs are high-touch, they offer that white-glove service,” added another former Stearns executive. “And there’s not a whole bunch of producers that are doing your typical G-Rate volume.”
In many respects, it’s hard to find such stark contrasts between two independent mortgage banks operating in the post-financial crisis years. Stearns has its sizable partnership business (led by Steve Stein), a more limited retail operation, and a wholesale channel that was the largest in the industry as recently as 2013, but has lost market share to United Wholesale Mortgage and a slew of other upstarts.
Guaranteed Rate, meanwhile, projects a very different image. It’s the home of the billion-dollar LO, a pure-play retail shop with physical offices on street corners across America that boasts an aggressive sales culture, but one that has been unwilling or unable to build new channels organically.
Ciardelli has a reputation as an intense, hands-on operator who is keen to grow Guaranteed Rate into a mortgage shop that can grace the same stage as a Rocket Mortgage. Stearns gets him ever closer to the $100 billion in annual originations, and gives him new distribution channels that can scale.
Stearns’ proper retail business will be folded into Guaranteed Rate’s, though the wholesale, JV, and partnership businesses will remain as stand-alone segments led by Stearns’ CEO David Schneider. That could prove significant.
“The first time one of Victor’s billion-dollar retail reps loses a loan to a broker who’s delivering to Stearns, all hell’s going to break loose,” said one industry veteran.
Another source said that other lenders have already begun reaching out to poach staffers at Stearns. “Nobody’s going to jump ship tomorrow, and I say nobody, if somebody’s really weak, they might jump ship,” one source said. “Everyone’s going to hang in to see how it works out. Where people are really smart from a recruiting standpoint, even on the JV partnerships, what you really want to do is begin to reach out, and then hang around the rim looking for a rebound.”
Another source said the shackles “may actually come off for a lot of the Stearns folks,” and they’ll be energized by a new opportunity.
The spectre of a Guaranteed Rate IPO
Ciardelli, the son of a lawyer who grew up in the Chicago suburbs of Oak Brook, founded Guaranteed Rate following a stint in commercial real estate. He bootstrapped the company with the help of $2.5 million in investments from friends and family, according to the Chicago Tribune, and gradually grew Guaranteed Rate into a regional and then national power.
In 2017, the firm experienced turbulence, according to several sources with knowledge. Investors needed to be paid back, and a number of top producers and managers left the company.
In 2017, Thomas H. Lee Partners, a private equity shop based in Boston, made a “material capital and strategic investment” in Guaranteed Rate. Crain’s reported at the time that it estimated THL’s “significant” minority stake in the company at $100 million, a number that Guaranteed Rate disputes, though they declined to give the exact figure.
As part of the deal for Stearns, Blackstone Group, which took full ownership in 2019, will receive an undisclosed minority stake in Guaranteed Rate.
Sources said Ciardelli, who remains the chairman of the board, has been able to run his business how he sees fit for decades, huddling with small and loyal group of lieutenants.
Multiple people who know Ciardelli said the scrutiny that comes from analysts, stockholders and compliance would be a challenge for him should the private equity investors drive the company toward an IPO.
One insider said Ciardelli is “not the kind of operator that would really enjoy having stock analysts shoving probes up every orifice he has every 90 days.”
But Blackstone on top of Thomas H. Lee Partners could tip the scales toward a public offering, especially given the arms race in the mortgage industry and private equity’s inclination to cash out when the time is right, several sources speculated.
“Sometimes when those guys do deal, even though they’re a minority [in the] deal, they often have a ratchet structure or something in their deal that if the timing and the opportunity is right, they’re going to drive the process as much as Victor’s going to drive the process,” said one source. “So, Victor, I don’t think he’s the same king he once was.”
James Kleimann is the Managing Editor at HousingWire. Email him at jkleimann@housingwire.com.
