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All's Well at Wells: Wells Fargo Home Mortgage, Des Moines, Iowa, has twice the brainpower leading the mortgage company with its two co-presidents sharing the executive duties. As a result, Wells is gaining market share while others are wilting.

Are two heads better than one? At Wells Fargo Home Mortgage, apparently the answer is yes--because the Des Moines, Iowa-based subsidiary of Wells Fargo & Co., the San Francisco banking giant, is standing tall in the residential mortgage market when most other big competitors have been chopped down at the knees due to subprime lending woes. The most apparent difference between Wells Fargo Home Mortgage and the competition? The company is headed by not one, but two executives: Mike Heid and Cara Heiden, who share the title of co-president and have done so since June 2004. The second difference between Well Fargo Home Mortgage and the likes of, say, Calabasas, California-based Countrywide Financial Corporation and Seattle-based Washington Mutual Inc. is that the company continues to generate healthy profits and expand during one of the most difficult mortgage cycles the industry has ever faced.




Before we dive into Wells Fargo's lending methodologies and how it managed to sidestep the worst of the country's mortgage ills, it's important to look at its unique management structure, because Heid and Heiden have been the architects of the company's good fortune.

Although their names are similar, Heid and Heiden are not related, not married and, as far as they know, have no genetic link, unless one counts the fact that they are both native Midwesterners--Heiden from Iowa and Heid from Wisconsin. In fact, collegiately they may have been rivals. Heiden earned her bachelor's degree in industrial administration from Iowa State University, while Heid got his degree in accounting from the University of Wisconsin. Heid was two years ahead in school, graduating in 1979.

The two, however, did come to be part of Wells Fargo the same way. They both were toiling for Minneapolis-based Norwest Corporation when it merged in 1998 with Wells Fargo in a $34 billion transaction then billed as a merger of equals--a fairly accurate description, as Norwest had at the time $57.8 billion in deposits and $96.1 billion in assets while Wells Fargo had $72.3 billion in deposits and $94.8 billion in assets.

Heiden worked her way up to co-president through retail and consumer lending, as well as loan servicing, while Heid claimed the chief financial officer title of the company's mortgage division and before that also ran its servicing division.

Heiden today oversees the production channels, servicing, consumer marketing and cross-selling, while Heid supervises capital markets, credit, finance and administration.

"Anytime you see a co-presidency, you have to ask is it genuine and is it really going to run that way, or is it a contest where someone wins and someone loses?," says Heid. "At least for me, that was the first question I asked--because if it was a contest, well, life is too short."

It was not a contest, and four years later the two executives have made the unusual co-presidency work.

"Most importantly, we are aligned on strategy, where we want to take the company," says Heiden. "Secondly, as co-presidents, we feel we can be more effective across the team and our business lines, and build deeper relationships with our customers and clients."

Heid adds, "The advantages that come from two of us leading the company is that we can divide our time and get a much further reach across the whole organization than one person. When you think about the complexity of the mortgage business and the complexity of the capital markets, the fact that two people can jointly give attention to all that, it is a wonderful step forward."

Maybe it's because they are both Midwesterners ensconced in an office building in the heart of the Midwest, that Heid and Heiden have been able to make a co-presidency situation work so well. On the other hand, maybe two people are needed.

Wells Fargo employs more than 11,000 people in the Des Moines area, making it either the No. 1 or No. 2 largest employer in the region, depending on the day. In total, Wells Fargo Home Mortgage counts for one-third of those Des Moines-based team members and approximately 24,000 employees nationwide. This includes 7,000 in servicing and 10,000 in the sale force, Heiden says.

"We have over 50 processing, under-writing and closing sites sprinkled throughout the country, plus 2,400 retail locations," she says.

Of all the decisions Heid and Heiden have made in their co-presidency, the most important occurred very early in their stewardship.

Strategic decisions

After Heid and Heiden slipped into their new positions, they chose to define and publish a set of responsible lending principles for the U.S. real estate lending business. Included were a couple of prescient, guiding insights: ensure customers have the ability to repay their loan; and when customers have prime credit profiles, offer them prime-priced product solutions.

While they seem fairly obvious, these measures were too often ignored at other companies. For example, during the height of the subprime lending boom--and Wells Fargo was a subprime lender--many brokers pushed subprime loans instead of prime loans because they earned greater fees.

"When a broker submitted a subprime application to us, we would run it through a filter," says Heiden. "If we determined, based on credit characteristics of the borrowers, they could qualify for a prime-priced product, we sent the broker's customer a letter saying that, based on our review, they could qualify for a prime product and suggested they go back and discuss it with the broker."

As could be expected, a number of brokers decided they could make better money with other lenders, says Heiden.

Second, back around 2004, when subprime lending was putting a lot of money to the bottom line of lending institutions, including Wells Fargo, Heiden recalls sitting in a conference room with Heid and others on the leadership team talking about the subprime business and responsible lending. At the meeting, they made the business-defining decision not to make, purchase or sell negative-amortizing or pay-option adjustable-rate mortgage (pay-option ARM) loans. In addition, the company decided not to offer stated-income loans below a certain credit score.

"We knew we were going to be giving up a lot of money and market share, but our overarching, responsible lending principle is to ensure the customer has the ability to repay," she recalls. "And how do you know if the customer can repay if you don't understand their income or assets and if the credit score is so low you are not comfortable?"

Heid and Heiden got a vote of confidence when Wells Fargo's senior leadership fully supported this direction despite the pressures on a publicly traded company to make profits.

What did all this mean for the company?

"In 2002 and 2003, our market share was rising. In 2004, 2005 and 2006, we gave up market share," Heiden responds. "And we found it difficult to retain and attract salespeople because we refused to offer the products that most of our competitors were offering. Interestingly, today, some of the same people who left our company then are now seeking jobs at Wells Fargo."


Richard Kovacevich, chairman, and John Stumpf, president and chief executive officer, explained the corporate view in Wells Fargo's 2007 annual report: "Because of our prudent lending to customers with less-than-prime credit and our decision not to make negative-amortization loans, we estimate we lost between 2 percent and 4 percent in mortgage origination market share from 2004 to 2006. That translates into losing between $60 billion and $120 billion in mortgage originations in 2006 alone. We're glad we did."

Another way to look at this, Heid adds, is to ask why certain companies initiated these practices while other companies like Wells Fargo did not.

"It goes back to what your desired outcome is," says Heid. "What is your operating philosophy? Cara [Heiden] and I stepped into these roles in 2004 and very early on we told the entire organization the outcome we were striving for was controlled, profitable, market-share growth. And we would not have one without the other. It's obvious some companies lost their way and were solely focused on growing market share. They lost control."

Downside business

This is not to say that Wells Fargo & Co.--the holding company--didn't have a few problems starting in 2007, most particularly with its home-equity business. Not only does Wells Fargo itself offer home-equity loans to its customers, but it also purchased the loans through indirect channels such as mortgage brokers, bankers and other mortgage companies.

In looking back on 2007, the company reported, too many Wells Fargo home-equity loans had loan-to-value (LTV) ratios that were too high, and when home prices fell in many parts of the country, losses were fairly severe.

In response, as of the third-quarter 2007, Wells Fargo stopped purchasing home-equity loans from third-party correspondents. Then, in the fourth quarter of 2007, it stopped purchasing home-equity loans through wholesalers when the borrowers were not Wells Fargo mortgage customers. Wells Fargo placed $11.9 billion of such loans--about 3 percent of its total loans outstanding--into a liquidating portfolio, and added $1.4 billion to credit-loss reserves primarily for losses incurred in this portfolio, the company reported.

In 2007, under Heid and Heiden's direction, Wells Fargo Home Mortgage exited the nonprime wholesale and correspondent channels for first mortgages.

"We do originate subprime, but in 2007, when economic conditions changed and, based on our review and quality of the production, we made a decision to discontinue buying subprime loans from the correspondent channel," says Heiden. "That was in the second quarter. We discontinued buying loans from the wholesale channel in the third quarter of 2007."

As of second-quarter 2008, net credit losses in what Wells Fargo calls its one-to-four-family junior-lien category were down $104 million compared with the first quarter, but that was primarily due to the change in its home-equity charge-off policy, the company reports.

Wells Fargo continues to originate subprime loans through its direct-to-consumer channel. "It is important that we remain committed to serving the subprime or credit-challenged segment," Heiden explains. "However, the pricing on conventional subprime currently is such that we can offer the customer a better solution through government products. Currently, FHA [the Federal Housing Administration] is the solution for many subprime customers, so we have temporarily suspended our conventional subprime product."

Actually, about 90 percent of the loans Wells Fargo originates are agency-backed--either Fannie Mae, Freddie Mac or Ginnie Mae. "The vast majority of the loans that we originate get sold into the secondary market, primarily through the GSEs [government-sponsored enterprises]," says Heid.

"We do have some assets that flow onto the Wells Fargo balance sheet. Most of that is nonconforming, above agency limits. But somewhere between 90 percent and 95 percent of everything we originate is intended for sale in the secondary market through securitization," he says.

In the second quarter of 2008, the company reported, while total retail mortgage originations were basically flat from a year ago at $31 billion, its origination of conventional conforming and government-guaranteed mortgages increased 40 percent from the prior year and represented 95 percent of its total home mortgage originations--up from 60 percent of originations one year earlier.

(The parent company of Wells Fargo Home Mortgage has always been keen on the agency business, and in June 2006 it acquired the Reilly Mortgage Group, San Diego, a company that provided financing to owners and operators of multifamily properties through the lending programs of Freddie Mac, Fannie Mae and FHA.)

"The effects of the continued lack of liquidity in the private mortgage-backed securities [MBS] markets and strong consumer preference for fixed-rate loans has resulted in a significant marketplace shift toward FHA, Fannie Mae and Freddie Mac mortgages--a traditional strength of Wells Fargo Home Mortgage," Mark Oman, the senior executive vice president of Wells Fargo's Home and Consumer Finance Group, said in prepared comments.

Turning it around

Susan Davis thinks of herself as one lucky woman. The executive vice president of national retail sales and fulfillment services at Wells Fargo Home Mortgage just flat-out exclaims, "I lead what I consider to be the best retail organization in the country."

Obviously, that's a purely subjective opinion. But what Davis can say, and does, about her team that other banks probably can't is that it is expanding--picking up seasoned professionals from other companies that are cutting back.

"We provide mortgages to customers through Realtors[R], builders, Wells Fargo branches and Fortune 500 companies," she explains. "We have about 10,000 home mortgage consultants located in all 50 states. They are in our banks and over 2,400 mortgage stores. Plus, for online customers we have call centers in Minneapolis and Tempe, Arizona.

So far this year, Davis says, Wells Fargo Home Mortgage added 450 new home mortgage consultants--and she expects to add more.

Without picking on the competition, Davis suggests the current troubles in the mortgage market have created "good recruiting opportunities, as there is still very high-quality talent that we are able to attract."

The company has also been adding outlets. "We have been growing stores and expanding the number of bank branches," says Davis. "As our branches grow, we create new mortgage consultant positions, so we expand with them."

As can be expected with new outlets and big additions to personnel while most of the industry has been running in the other direction, Wells Fargo has been able to claw back market share.

In 2007, the company commented in its annual report, "Wells Fargo Home Mortgage had a relatively good year and was the nation's No. 1 retail mortgage originator for the 15th consecutive year despite the sharp housing downturn and turbulent secondary markets. Mortgage originations declined 7 percent to $272 billion."

At the end of the first quarter of 2008, Davis points out, Wells Fargo gained retail market share and now has 15.8 percent of the retail residential origination business; that was up from 13.4 percent in the first quarter of 2007 and 14.2 percent from the fourth quarter of 2008.

Even with its wholesale and correspondent businesses thrown into the mix, Wells Fargo still looks good. The company ended 2007 with 11.2 percent of the total mortgage market done in America, says Heiden. "At the end of the first quarter of 2008, Wells Fargo topped 13.7 percent. According to Inside Mortgage Finance, Countrywide held 14.4 percent of the market, or $69 billion in loans, while Wells Fargo did 13.7 percent, or nearly $66 billion in loans," says Heiden.

The company reported mortgage applications of $100 billion in the second quarter compared with $132 billion in the first quarter; 44 percent of these applications in the second quarter were for refinancing, down from 62 percent in the first quarter; and an unclosed pipeline of $47 billion in the second quarter as compared with $61 billion of mortgage applications in the pipeline in the prior quarter.

Richard Bove, an analyst with Punk Ziegel & Co., Tampa, Florida, now a part of New York-based Ladenburg Thalmann & Co. Inc., has been relatively bullish on Wells Fargo, and one of the reasons he likes the company is its positioning in the West vis-a-vis the quickly ebbing competition.

"Wells Fargo is a well-run company; diversified, but has had some loan-loss issues to deal with in the subprime area because it owns a consumer finance company. It operates in an area of the country where the competition for banking services has declined precipitously," Bove says. "Countrywide, Washington Mutual, Golden West [Financial Corporation, Oakland, California--now owned by Charlotte, North Carolina-based Wachovia Corporation] are at the moment not effective. Bank of America [Charlotte, North Carolina] is not really pursuing the business now that it has picked up Countrywide. The community banks are in trouble, so there are only two or three banks in that area of the country that are still expanding," he says.

Because the country is not in a recession as yet and the economy is still expanding, according to the gross domestic product (GDP) figures, Bove adds, "We see Wells Fargo is still making loans. Its margins are solid and its deposits are growing. It has a lot of loan losses, which everyone else has, too. Those will pass, and the fact that they are increasing their market share is critical."


Wells Fargo has also been gaining on perennial industry leader Countrywide in the mortgage servicing arena as well.

"We rank second, but it's close--neck-and-neck," exclaims Mary Coffin, executive vice president and head of mortgage servicing for Wells Fargo Home Mortgage.

Coffin reports Wells Fargo Home Mortgage counts 8 million customers with mortgages valued at $1.54 trillion. "If you are just considering mortgages, Inside Mortgage Finance reported about a year and a half ago we moved ahead of Countrywide, then last year Countrywide was back at No. 1. But we are talking about a difference between $1.55 trillion and $1.5 trillion, so it is very close."

Wells Fargo's servicing portfolio grew by 6.1 percent (dollar amount of loans serviced) from the end of second-quarter 2007 to the end of second-quarter 2008, the company reports.

The portfolio is outperforming that of its peers in terms of foreclosures. The company's 2007 annual report noted, "Our foreclosure rate in our home mortgage servicing portfolio in 2007 was more than 20 percent better than the industry average. Less than one in every 100 loans in our servicing portfolio was in foreclosure."

In May 2008, just 1.9 percent of the portfolio fell into the 60-days-or-more delinquency category, says Coffin. However, the data that everyone is watching these days are all about foreclosures. These numbers have been climbing at Wells Fargo, although very slowly and they remain well below industry averages.

At the end of second-quarter 2008, 1.02 percent of the company's loans were in foreclosure, Coffin reports, and "at year-end 2007 it was 0.88 percent, and the year before that 0.74 percent."

Of the millions of mortgages Wells Fargo services, about 3 percent are adjustable-rate mortgages for customers with less-than-prime credit whose interest rates are expected to increase before the end of 2008, the company reports, "and eight to nine of every 10 of these customers are expected to pay in full, refinance, manage the payment or benefit from a solution."

Coffin's group continues to be very aggressive in trying to head off problems before they turn to foreclosure. It contacts all customers with impending ARM resets, offers a toll-free number they can call to discuss solutions and provides credit-management education programs.

"Wells Fargo starts the loss-mitigation process as soon as possible and we work our way through to foreclosure, if necessary," says Coffin. "You often hear in the industry, one doesn't start loss mitigation until the customer is seriously delinquent--90 to 120 days. We found the longer you wait, the harder it is to help customers remain in their homes."

New hope

When Wells Fargo conducted a study of its borrowers who were 60-or-more days delinquent on their loans but not in foreclosure or bankruptcy, it discovered that for every 10 of these borrowers, seven worked with the company on a solution, two declined Wells Fargo's help and the remainder were either unreachable or a solution could not be found.

As a result of its ability to move on its own research, Wells Fargo joined with other lenders, the Washington, D.C.-based Mortgage Bankers Association, the Financial Services Round table and the Treasury Department to find commonality and create streamlined practices that could help borrowers in tough situations. The result was a group called the HOPE NOW Alliance, Washington, D.C., and in June it issued guidelines and best practices to help financially strapped borrowers with home-retention solutions.

HOPE NOW has also prevented 2.07 million foreclosures since July 2007, the organization reports. "These were people that were on a track to foreclosure, in serious delinquency and didn't know where to turn," says Steve Bartlett, president and chief executive officer of the Financial Services Roundtable. "Through HOPE NOW we returned them to the original lenders, who provided a suitable mortgage and kept them in the house," says Bartlett.

HOPE NOW was started through the Roundtable's affiliate association, called the Housing Policy Council (HPC), Washington, D.C., of which the chairman is Mike Heid.

"Several years ago, we identified a problem in the subprime mortgage business--and that was a significant increase in delinquencies and foreclosures," explains Bartlett. "Mike Heid was on the executive council when we did this; we started a counseling service called HOPE that provided independent, nonprofit, free counseling to people who were at risk of losing their homes."

Then in September 2006, Heid and the others received calls from Treasury Secretary Henry Paulson, saying that some kind of national borrower counseling service needed to be initiated to prevent foreclosures.

There are now 27 different servicers in HOPE NOW, and members handle about 90 percent of all subprime borrowers and about two-thirds of all prime borrowers, says Coffin.

HOPE NOW's new guidelines set common expectations for distressed borrowers, such as the documents they will need to provide to discuss solutions and when they will receive communication from their servicers. The guidelines also recommend conduct related to customer outreach, the types of solutions servicers should investigate with at-risk consumers, tracking home-retention performance and how to manage the subordination of second liens.

Wells Fargo has made sizable investments in innovations, technology and staffing to deal with problem loans, says Coffin. "But most of the programs we initiated we did through HOPE NOW, because we played a leadership role in the group. What was valuable in HOPE NOW we tried to bring to the nation because of the crisis we are in today."

"I don't think HOPE NOW would have been nearly as successful had it not been for the individual leadership of Mike Heid and the corporate leadership of Wells Fargo," says Bartlett. "There are dozens of people, if not more, at Wells Fargo who have stepped up. The company has a culture of giving back and doing the right thing."

Steve Bergsman is a freelance writer based in Mesa, Arizona. He can be reached at
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Title Annotation:Profile
Comment:All's Well at Wells: Wells Fargo Home Mortgage, Des Moines, Iowa, has twice the brainpower leading the mortgage company with its two co-presidents sharing the executive duties.
Author:Bergsman, Steve
Publication:Mortgage Banking
Date:Oct 1, 2008
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