Rebounding on Real Estate Lending

Stephen Lange Ranzini
Stephen Lange Ranzini

By Stephen Lange Ranzini

Since 2005, University Bank has been a top-performing bank nationwide with an average return on average equity over that time frame of 16.8 percent. In five of those 11 years and three of the last four years, our return on equity exceeded 20 percent.

In the years we didn’t outperform, our results were usually dragged down by our local Michigan economy, which lost one-quarter of all jobs statewide as the auto economy collapsed from 2001 to 2008 and the state’s unemployment rate soared to 15 percent. Overall, during the Michigan depression we lost only $3 million in loan losses on a starting portfolio of $60 million, or a 5 percent loss rate. Many local community banks suffered 15 percent loss rates. University Bank entered the new century hunkered down because I correctly convinced our board, asset-liability committee and lenders that a secular decline was coming in the auto economy and to take steps to reduce our exposure to auto-correlated lending.

University Bank
Ann Arbor, Mich.
ROAA in 2015: 2.11 percent
ROAE in 2015: 25.50 percent
Assets: $181 million
Retail locations: One office, 14 loan production offices, five operations centers
Employees: 335
Founded: 1890

However, playing defense would not have gotten anything but average results. Our bank’s ongoing outperformance stems from the fact that our cost of funds is just 2.8 basis points, and we use those funds to support a balance sheet that mostly funds a mortgage banking operation that generates four times our balance sheet every year. We also own a residential mortgage subservicing business that works on behalf of more than 360 financial institutions that generates more zero-rate escrow deposits than our own balance sheet requires. Our subservicing business is known for friendly, responsive service and industry-leading technology that help lenders retain customers, reduce costs and ensure regulatory and operational compliance. Our mortgage subservicing customers have 14 times fewer complaints than the industry average, according to the Consumer Financial Protection Bureau’s complaint database.

Having exited the residential origination business in 2001 due to valid concerns about so-called NINJA (no-income, no-job and no-assets) loans and other shady loans, we reentered the business in December 2007. That was a perfect time because we weren’t weighed down with past problems, and the only loans that were saleable were again A-rated credits to the housing government-sponsored enterprises.

Our residential origination business offers the full range of secondary market loans, including loans involving Federal Housing Administration, Veterans Administration and U.S. Department of Agriculture Rural Development guarantee programs, and not just loans sold to Fannie Mae and Freddie Mac. In fact, last year $103.4 million of our $714.8 million of mortgage loans that we originated were to veterans through the VA loan program and another 60 percent of our loans were FHA loans, which also offer higher margins than Fannie Mae and Freddie Mac eligible loans.

Because we have the full range of loans, we can get more homebuyers approved, and as a result, local real estate agents make us their first choice for referrals. We offer this service on a correspondent basis to other community banks so they can capture more real estate agent referrals in their local market.

Because of our large residential mortgage subservicing and mortgage origination businesses, 95 percent of the overall revenue of our bank comes from fee income. In fact, University Bank earns about 9 percent of all fee income earned by Michigan-chartered banks statewide.

Stephen Lange Ranzini ( is president and CEO of University Bank.