It was Friday afternoon and the financial markets had just closed for the day… but the mood was tense in the boardroom of Gateway Savings & Loan.
President I. Owen Funderburg knew he needed to steel his resolve, but he couldn’t help pacing nervously. He needed to find an answer to an unexpected problem.
The year was 1980, and the Federal Reserve (the Fed) had just raised interest rates again – sending shockwaves through the small thrift’s once-steady world.
Gateway’s ledger was bleeding red, and the phone lines buzzed with worried depositors demanding to withdraw their money. The threat of a bank run was imminent.
Funderburg understood the problem very well.
Gateway Savings & Loan had built a large portfolio of fixed-rate mortgages throughout the 1970s – when interest rates were more reasonable.
But with Mr. Volcker at the Fed hellbent on whipping inflation by raising interest rates dramatically, the bank’s short-term deposit costs now exceeded its loan yields… making its mortgage portfolio a millstone around Funderburg’s neck.
The only question was – what should Gateway do about it? It was the same problem every savings & loan outfit was facing across America.
As Funderburg paced the boardroom, the weight of responsibility pressed on him. He couldn’t help but think of what would happen if the institution failed—if he failed.
Funderburg pictured the boarded-up windows of another failed thrift and the line of anxious customers outside clamoring to withdraw their life savings… and he knew he couldn’t let that vision come to pass.
Gateway Savings & Loan was something of a pillar in north St. Louis. It was a small thrift where working-class residents could get affordable mortgages and the direct financial guidance that larger banks wouldn’t bother to offer.
For many customers, to lose Gateway would mean more than just the loss of a neighborhood bank. It would represent a loss of hope. The neighborhoods Gateway served would likely see credit dry up, local businesses struggle, and family dreams of homeownership slip away.
And it wouldn’t stop at St. Louis.
Funderburg knew that thrifts everywhere were desperate—hemorrhaging deposits, facing losses they couldn’t hide, and holding mortgage portfolios that had suddenly become anchors dragging them under.
If institutions like Gateway failed en masse, the effects would ripple across the country. Whole neighborhoods would lose access to credit, real estate values would spiral downward, and faith in local banking would evaporate. People would learn the hard way what happens when the system designed to make homeownership widely accessible collapses.
So Funderburg was determined to be proactive. Having risen through the banking ranks in the segregated South, he knew what was at stake. Gateway was a bastion for underserved families in St. Louis, and it often provided a lifeline for customers in neighborhoods that larger banks ignored.
That’s why he called the emergency board meeting after market close on a Friday afternoon. He wanted all hands on deck, and he made it clear that they would discuss every possible idea – no matter how long it would take.
Fortunately, a prominent real estate broker sat on Gateway’s board, and – after some initial discussion – he put forth an interesting idea.
“There are investors out there – far from this boardroom and even far from St. Louis – who might want to buy the mortgages we hold on our balance sheet… for the right price, of course. I would be willing to put some calls out to my network if we want to consider this option.”
It was something of a radical idea in the pre-Internet age – back when business was often conducted in person and on paper. Wheeling and dealing with investment assets like this may have been common on Wall Street, but not so much in the Midwest.
After some discussion and putting the idea to a vote, it was settled. Gateway would seek to stop the bleeding by selling the bulk of its mortgage portfolio for immediate cash. Then it could show depositors that the bank had everything under control.
Sure enough, Gateway found that there was ample investor appetite for its mortgages, given that the thrift was willing to sell them at a discount to the unpaid principal balance.
These deals provided investors with a suitable return and monthly cash flow, and they provided Gateway with the cash infusion it needed to shore up its balance sheet and reset its relationship between deposit costs and loan yield.
The sale was invisible to most. But for Funderburg, it was made possible by something of a secret world – the secondary market for buying and selling mortgage notes.
And here’s what’s most interesting about that world – it’s open to everyone.
One does not need to be an accredited investor or have tons of money lying around to invest in mortgages for cash flow. They come in all shapes and sizes.
We’ll talk more about how mortgage notes come to be tomorrow. And then to explore this secret world in more detail, we’re going to host a strategy session next week. In it, we’ll pull back the curtain and demonstrate how anyone can use this asset class to create thousands of dollars in extra monthly cash flow in a short period of time.
The session will begin at 7:30 pm Eastern next Wednesday, October 8. I expect it to run for 45 minutes to an hour. Then we’ll open it up to open forum Q&A.
If you would like to join us, you can register for the session at: https://phoenicianleague.com/session
-Joe Withrow