Wall St mortgage wizards try again, with Philly firm

(Revised) Veteran Wall Street home loan financier Lewis Ranieri has picked a three-year-old suburban Philadelphia firm as their base for re-capitalizing the depressed U.S. mortgage industry.

Ranieri, who developed mortgage-backed securities while at Salomon Bros. in the 1980s (you can read about him in Liars' Poker, Michael Lewis' classic), and Thomas O'Neill, founder and until last year chairman of the investment bank Sandler O'Neill and Partners, have bought control of Jerry Schiano's New Penn Financial LLC, which since its founding amid the wreckage of the real estate markets in 2008, has grown to include 24 offices and 400 employees, including 150 in Plymouth Meeting and other PA sites.

Last year, New Penn says, it financed around 5,500 home loans in 42 states, for an average $218,000 each, totalling close to $1.2 billion. (Updated)

A price wasn't announced, but Schiano told me the new investors "took out all" the initial investors and added "a very, very fair return", on top of the $13 million originally paid in by Schiano and others, including Roundtable Investment Advisers, Charlotte, N.C. Managers are keeping thier jobs and a one-third ownership stake, Schiano added. 

New Penn, backed by Ranieri and his allies at Shellpoint Partners, may make other acquisitions and hires, especially in Philadelphia and other target markets, says Schiano. Ranieri's and O'Neill's goal is to resume packaging and selling mortgages to finance new loans, a process that remains slumped as banks sort through their losses from the past real estate bubble and government loan guarantors tighten borrower requirements.

What was Schiano thinking when he started a new mortgage lender at the bottom of the market? "We made a bet that there would still have to be mortgage lending," and a new firm without "legacy issues" would be able to "evolve with the market," including a scarcity of the banks that used to fund home loans aggressively, and stricter federal lending guidelines, including mortgage insurance requirements that have boosted costs for first-time buyers despite record low interest rates.

The bet has paid off - New Penn was profitable "within a few months of its founding" and was sold at a profit -but the mortgage market "is still a scary place," added Schiano, who ran the former Wilmington Finance Co. before selling it to AIG Group in 2004.

Schiano says tight government loan rules are driving more borrowers to firms like his. He cited the example of a law firm partner "who took a pay cut to work for the White House" and was unable to get a Federal Housing Administration-backed mortgage when he returned to his firm and his higher pay rate: "He had a great job and a high net worth. But he didn't fit the government profile," or the banks'. 

Buyers with access to private money are raising cash to buy homes "because the banks won't lend them money. We see opportunity. The markets really aren't open yet."

So is the mortgage market coming back? "It's very, very attractive right now," with record low rates, for those who qualify. But "I can't tell you where rates are going in the future. Only that they'll be different."

The Shellpoint manager-owner team includes Bruce Williams and Saul Sanders (a Wharton grad), who ran the private-mortgage (non-agency) securitization firm C-BASS from its 1996 founding to 2007; Robert Magee Jr., who managed the private mortgage business at Chicago-based Citadel Investment Group; and Schiano. The Ranieri-O'Neill-Shellpoint group's other assets include a distressed commerical real estate fund; Six50 Capital, a mortgage-backed securities adviser; Selene Mortgage Opportunity Fund which buys distressed home loans; SOLIC, a turnaround shp; WP Global Partners, a private equity fund-of-funds; Helios AMC, a special servicer for distressed commercial real estate loans. Ranieri's other investment partners include Thomas O'Neill, former head of Sandler O'Neill + Partners, the Wall St investment bank.