Getting Out of the Mortgage Squeeze

"Our timing was very bad," Eric Billings, chief executive of FBR, says of the firm's series of investments in subprime mortgage lenders. (By David Seibert -- Arizona Republic)
By Zachary A. Goldfarb and Jeffrey H. Birnbaum
Washington Post Staff Writer
Monday, October 15, 2007

Long before the mortgage market fell apart this summer, Friedman Billings Ramsey, Washington's largest investment bank, saw the trouble ahead.

In early 2005, the company invested an eye-catching half-billion dollars, a third of what it had available, in the subprime mortgage business, even buying a mortgage lender. The company bet big that these high-risk loans to people with poor credit would return impressive profits.

But by the end of the year, FBR realized that it had miscalculated. The Federal Reserve kept raising short-term rates, and the firm suddenly was paying more to borrow money than it received in interest on its loans. Its mortgage portfolio was getting squeezed.

FBR sold some investments to stem the losses but didn't move aggressively enough. Eventually, 80 percent of its mortgage-related investment would be lost and the company's stock price would spiral downward. From January 2005 through Friday, the company's stock lost nearly three-quarters of its value, costing shareholders $2.5 billion.

"It was brutal, extraordinarily difficult. There's no other way to describe it," said Eric F. Billings, the company's chief executive.

FBR is one of many financial institutions that were bruised by the recent collapse of the subprime mortgage market. Wall Street's top investment banks reported recently that they had lost about $5 billion in just three months because of bad loans. In addition, dozens of mortgage lenders have collapsed and tens of thousands of families have lost their homes to foreclosure.

The recent decline has been particularly vexing for Billings, 55, the last FBR founder still at the firm and a prominent figure in the Washington area's close-knit business establishment. The rewards that the bank reaped during the subprime boom and the pain it has felt in the subsequent bust show how financial bubbles can sweep up even the most experienced professionals.

"Our timing was very bad," Billings said.

For years, Billings's timing on mortgage matters was very good. After 18 years in business, FBR made a name for itself largely through its expertise in the mortgage industry. Its specialization enriched the company's founders, employees and shareholders, and earned it some renown in the investment world, even though it was dwarfed by century-old Wall Street giants.

Billings's decision to dive deeply into subprime lending, however, transformed the company's strength into its greatest weakness, and the company got burned. "The judgment I made to do that was wrong," Billings said.

FBR was started in 1989 by Emanuel J. Friedman, a former history teacher; W. Russell Ramsey, a former Pitney Bowes salesman and George Washington University alum; and Billings, a University of Maryland graduate who had worked for Legg Mason, the Baltimore investment house. They borrowed $1 million to launch a research-and-securities-trading firm in the unlikely environs of the District, 250 miles from Wall Street.

At the time, savings-and-loan institutions were floundering after heavy lending for commercial and residential properties put the industry on the verge of collapse. As a new company, FBR helped raise money for the thrifts, providing them with the capital they needed to recover.

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