Based on the common wisdom about the state of mortgages in the U.S., you might think all mortgage companies are on the brink of going out of business. Daniel Milstein, the 30-something CEO of Gold Star Financial has taken some calculated risks by investing in employees, service quality and marketing, after avoiding the temptation of getting involved in the subprime mortgage bubble that burst a few years back. This discipline has catapulted Gold Star from an Ann Arbor firm to a profitable national player in the mortgage market.

Milstein, who emigrated from Russia, didn’t start his career here with a silver spoon but rather endured poverty for several years. In a recent interview, he said, “I am blessed, especially for a guy who came to the states with 17 cents from Russia on Dec. 4, 1991. I went through 'the projects,' having food stamps and to be in the position where I am today is absolutely amazing.”

I conducted this interview over the phone just before the holidays, and was most impressed by Milstein's high energy, passion and candor, and his willingness to answer any question, often before I was finished asking.

The lesson I took from the interview is a reaffirmation that “easy money” is usually a trap. We should think long and hard before we jump into the fray, as evidenced in the subprime market. Secondly, tough times are the best times to invest in marketing and improving the service quality of a business.

Read on for more discussion with Milstein.

Marr: What is the most challenging thing about driving revenue in today’s economy?

Milstein: Our biggest challenge is dealing with the new industry regulations that have been imposed as a result of the financial meltdown in 2007 and 2008. The landscape of our industry has changed completely. In Michigan alone, at the peak of 2005 there were an estimated 36,000 loan officers, and based on a recent check with the state of Michigan, now there are only 2,541 licensed loan officers, which represents a 93 percent decline in the number of mortgage companies in the state of Michigan. I’m for regulating and change in the business. Our company has never engaged in subprime (mortgages) and that is the key to our survival. Our mission from Day One was high volume at discount prices and so we attracted a different kind of client. Our customers’ average credit score is 742, and with normally higher-than-the-average income. Gold Star has 4.4 percent of the market share of government loans here in the state of Michigan. Through July 2010, we were ranked the No. 1 FHA lender in Wayne County. We basically work with anybody and everybody and try to help them with their financing needs.

Marr: So you were staying out of the subprime business?

Milstein: There were two major reasons for this. First was our overall business model of high volume at discount prices. The more people we help, the more referrals we will get. In some cases we’re on to the third generation of our clients right now. The second reason was that we knew the subprime market would not last. As an underwriter at Ann Arbor-based Interfirst (owned by ABNAmro, later sold to Citigroup), a highly successful wholesale mortgage company in the 1990s, I started seeing pay stubs from the Big Three auto companies (Chrysler, GM and Ford) and workers on the line would be making anywhere between $130,000 to $250,000 a year and at the same time we saw a trend of car prices going up by 50 percent a year in early 2000. With an underwriting background, I knew this wasn’t going to last forever, so we actually called for (i.e. predicted) a housing correction in 2002. I did not know how bad things would get, but I did believe that the bottom would fall out of the subprime market.

We decided to take Gold Star from a regional presence to the national level, so we diversified and started doing business in over 20 states across the country. The reason why 93 percent of my competition in Michigan has gone out of business is because most of the other firms were doing subprime or they were more concentrated on local business, and Michigan through 2008-2009. Only now are we seeing some changes where people are buying and refinancing. Unfortunately most people are still way under water.

Marr: Is it true that this is consistent with the national average or is Michigan …

Milstein: Michigan is worse than most. For example, we’re seeing very good success in Texas, Washington, Oregon, Connecticut and Massachusetts; those areas are by far performing better than here in the state of Michigan. The worst markets are Arizona, Florida, Michigan and Nevada. The difference is in those other three states I mentioned, there was a lot of financing; people were buying homes to make money. You buy a house, the price goes up 50 percent a year and in some cases 100 percent a year. So people who really shouldn’t have been were buying houses. In those vacation markets, prices have collapsed perhaps even worse than Michigan. It is not pretty in our state either. For example, in Oakland County, West Bloomfield, Bloomfield Hills and Farmington Hills have been hit the hardest. Of my customers who are coming back to us after purchasing their homes in the mid-'90s, their values 12 years later are considerably less then what they paid originally.

Marr: What percent of Michigan homeowners are under water with their mortgages?

Milstein: I am not sure what the current numbers are. But recently I saw statistics indicating that 25 percent of American’s have a credit score of less than 600 points.

Marr: So those people don’t qualify for the kind of approach that you take?

Milstein: The government came out with a program to refinance up to 125 percent of their appraisal, but unfortunately the problem in some case is they are more than 125 percent under water. In Wayne County for example, the qualification quality criteria isn’t as good as it should be.

Marr: What are you doing, if anything, differently than you were prior to 2008? Is it working?

Milstein: Training. Right now we keep telling everyone if you haven't been in the mortgage business since December 2009, you need to be retrained completely. With almost 400 employees, we have quadrupled our training budget. Now loan officers must be licensed in the state, whereas before you didn’t even have to have a high school diploma to be a loan officer. Not only do they have to attend a 20-hour course, additionally they have to pass an exam. I believe the passage rate is only about 60 percent, so 40 percent fail. In addition, you have to have good credit and also pass a criminal background check. This licensing requirement is one reason we have seen such a decline in loan officers. And we’re going to see an additional 15 percent decline in the second quarter of 2011.

Marr: So you think this will continue?

Milstein: Absolutely, because not everyone can pass the exam. The licensing went into effect Oct. 1 of last year. The final enforcement was on Oct. 14 I believe, by which time everyone was to be licensed. Since loan officers would not be able to up-sell the interest rate to make more money for them, it's driving a lot of the folks out of the business.

Marr: Is your strategy working?

Milstein: It is working very well, because when the subprime market was at its peak, if you had a pulse, you could get a mortgage product, and almost anyone could be a mortgage originator. Now, only a true expert would be able to arrange financing, because the rules have completely changed. Previously, the focus was on high volume at any cost, but now it is all about quality.

Marr: The age of the “paper mill” in mortgages is over?

Milstein: That’s correct. At this point in time it’s all about the quality, not the quantity.

Marr: So how are you making it work? Milstein: We have a multimillion-dollar budget; we spend 80 percent on a sure thing and 20 percent on prospecting. It’s a manageable risk and that is why our company has done so well, because basically we have used 20 percent for marketing. That hasn’t changed; we’ve always done the same. But what has changed is our company has gone up in size since the meltdown.

Marr: So how big is Gold Star Financial?

Milstein: We fund about $1.4 billion a year with 400 employees. Inc. Magazine ranked Gold Star as one of the 500 fastest-growing privately held companies in America for the last two years. Our revenue has gone up by 712 percent from 2005 to 2008, and 430 percent from 2006 to 2009. Right before the financial meltdown, we cleaned our balance sheets; when there was a complete freeze in the markets we didn’t have any un-sellable loans on our books. When other companies pulled out of the market completely or were just hanging in there, we quintupled our marketing dollars and put our foot on the pedal. And we just hired a lot of seasoned people, who if it wasn’t for the meltdown might not have come here. Gold Star was named a top work place for two years in a row. We did not lay off a single person during the meltdown. In fact, we went up in size and now have more than 400 high-quality employees.

Marr: I noticed that you recruited some of the independent mortgage companies in town. I’m guessing you’re doing that in other states as well?

Milstein: That’s exactly right; we are basically going after high-quality people. Marr: What’s your biggest obstacle today?

Milstein: Throughout the industry, quality is the biggest obstacle. Desperate people do desperate things. We have been very careful. We have stepped up our quality control to make sure our loan officers are doing what is right for the customer, so there is no fraud going on at all.

Marr: Does that extend the process?

Milstein: No, our underwriting time is down to three days. We streamlined our processes and also tripled our operations department staff to handle any increase in volume.

Marr: How has your job changed as a result of the tough economy?

Milstein: It is absolutely not the same; I have added reasonably to my employees. I wake up thinking about my clients. With 400 employees, I have about 1,500 family members that depend on me to save their jobs. Several years ago, I used to originate a lot more of the loans. I still do the loans, but now I do so with 11 assistants, whereas at one time I only had one assistant. In addition to originating, my day also consists of planning, forecasting and meeting and communicating with my employees, and also keeping up on changing guidelines and dealing with the regulators.

Marr: Are you working more hours?

Milstein: I am working about 25 to 30 percent more hours, but thanks to technology I don’t have to be in my office at all times. After hours, I’m logging on to my work computers from home and communicating with my clients and employees. In addition, we have a great group of managers and other employees. I appreciate the opportunity to help them reach their goals as well. I lead my example and have an open-door policy. My mission is about my employees. It was nice to know that we have been judged as a Top Work Place by the (Detroit) Free Press and that we made it on the Inc. 500 list as well. Reading the comments about how hard our management works was very rewarding.

Marr: What advice would you give other leaders based on your experience?

Milstein: Look forward. One thing I told my employees when the market froze and they were all saying our economy was in a recession was that we refused to participate in the recession. So, don’t look back. Forecast, do what’s right and spend money on marketing, because if you pull out of marketing, then things will dry up. Take risks, but take calculated risks. Don’t put yourself in front of your employees, put your employees first. My employees would throw themselves under the bus for me; they all love their jobs and have a sense of ownership. It’s exciting for me to get the respect from my people; I work side-by-side with my employees. Teamwork is very important.

Joe Marr is a public speaker, sales and management consultant and trainer, and runs Sandler Training Ann Arbor at 501 Avis Drive. To reach him, call 734-821-4830 or visit his website at www.sandlerannarbor.com.