Both banks and homeowners across the United States and around the world have
spent the past five years cleaning up their balance sheets, negotiating with
governments and collectively licking their wounds from the frenzied mortgage
markets of the last decade. Now, as the dust clears across the financial
sector, irony abounds as the largest mortgage lender in the US has also emerged
as the most valuable bank in the world.
Throughout this period, San Francisco-based bank Wells Fargo has consistently
reported lower-than-average mortgage delinquency and foreclosure rates compared
to other large banks in the US. As of June 30, the bank serviced $1.5 trillion
in home loans originated or securitized by others, in addition to the $367
billion in residential mortgages it owns and services.
Like most other major banks those that survived the crisis at least Wells
has not gone unscathed. The bank has agreed to more than $6 billion in
settlements related to servicing and foreclosure practices. And, even as the
bank continues to work through modifications and foreclosures, Wells has gained
a reputation for very conservative loan policies and longer due-diligence
cycles visibly frustrating customers in numerous online forums.
Both the lower delinquency rates and some of the recent customer complaints may
be the result of its approach to mortgage risk management: lending more
conservatively mitigates risk for both the borrower and the bank.
BBC Capital spoke with Franklin Codel, executive vice president and head of
mortgage production for Wells Fargo, about this two-sided view of mortgage
lending.
Based in West Des Moines, Iowa, Codel leads all activities around sales,
underwriting, closing and processing of Wells Fargo originated mortgages. His
division has experienced the ups and downs of a tumultuous decade in the
mortgage and housing markets and is currently the largest originator in the US.
BBC Capital: How do you and the bank view customer relationships, specifically
through home lending?
Codel: Mortgages are the second-biggest source of customer relationships with
Wells Fargo after checking accounts, so it s a big part of the lifeblood of
bringing in new people and earning deeper relationships over time. For example,
customers with Wells Fargo mortgages looking to refinance tend to stay with the
bank over 50% of the time. [Refinance deals are often incentive for people to
change banks.] If someone is moving, we set them up with local representatives
in the next city.
BBC Capital: How does the bank view the risk equation, specifically when
working with customers to originate mortgages?
Codel: To help our customers succeed financially, manage risk in the business
and do the right thing , you have to first lend well and understand the
mortgage model. This means a balance of doing what s right for the consumers,
as well as the bank and investors. In 2005 and 2006, [some] lenders were
lending based on what investors would buy, not necessarily what was right for
the customers. Having a deep appreciation of the long-term view and the
business model itself has helped guide us in making a lot of decisions over the
years about how to be an effective lender.
BBC Capital: What type of risk management, education and outreach does the bank
do to maintain low delinquency rates?
Codel: This starts with strong responsible lending principles and prudent
underwriting. For these reasons, we didn t originate some of the loan products
[that historically have] higher default rates. We will at times, and in many
places have more conservative credit policies than those required for selling
loans into government programs.
We were never driven to grow market share. This leads to dangerous decisions.
Market share is the result of a good value proposition, a good sales team, a
good price and doing the right thing for customers. For example, we have
recently made tremendous investments in outreach through home preservation
workshops and invited customers who may be having financial difficulties. We d
like to see if we can find a solution like a loan modification or other
alternative besides foreclosures. This local outreach helps customers who are
afraid to admit they have a problem, afraid of calling in to the large machine.
[One of the most toxic mortgage products Wells Fargo acquired when it purchased
the struggling Wachovia Bank in 2008 was known as Pick-a-Pay loans, originated
by a bank earlier bought by Wachovia. Wells Fargo has modified 115,000 of these
loans and forgiven $5.3 billion in principal on a portfolio that was $115
billion when purchased.]
BBC Capital: For the bank, how has owning a large amount of the mortgages it
originates as opposed to selling the loans into vehicles bought by investors
helped this process?
Codel: Ownership of loans has helped us with more creative thinking. It s very
important to control losses and help customers who wanted to stay in houses.
With an owned portfolio, principal forgiveness is easier and there s more
flexibility. We own the asset, we are the investors, we can do what we think
makes sense. [Wells does not disclose principal forgiveness figures.]
BBC Capital: Have you strengthened the ties between mortgages, borrower
education and financial planning?
Codel: Not all customers are ready for homeownership, so now we are giving
people tools to help prepare them for that and come back to Wells Fargo when
they are ready. For customers who have been declined, we are offering to get
them started on credit counselling and paying for initial sessions. We can t do
the budgeting for them, we can t do the saving for them but we can certainly
lay out the roadmap.